Fees as a percentage or fixed cost?

Financial consultancy firm, Action Consulting, has published its Sixth Adviser Snapshot report based on a poll of advisory firms and examining a wide range of related issues.

Apparently two-thirds of advisers continue to charge for their initial service as a percentage of the money to be invested.

We used to charge on this basis but decided that our charges should be both transparent and good value for money.

We therefore changed to a fixed fee basis for both advice and implementation services.

In many respects charging expressed as a percentage of money to be invested simply replaces the old commission model where adviser payments were determined and managed by product providers.

Whilst adviser charging, introduced by the Financial Conduct Authority’s Retail Distribution Review programme, puts the client/adviser relationship back in control of price, it remains the case that most advisers don’t charge for advice as such.

Rather they charge when there is an investment product sold.

Our view is that the real value to our client is in the delivery of advice regardless of whether or not that results in a recommendation of a product solution.

We believe (as do our clients) that it is valuable enough to pay an explicit fee for it.

We value our independence and all that brings to our clients. Part of that independence is our ability to think independently and without constraint.

As we are paid for our service delivery it puts us under no pressure at to recommend a product solution in order to be paid. So it follows that we only recommend a financial product when it is necessary for our client.

For ongoing service we do express our charges as a percentage of the assets that we manage for our clients.

This makes sense because it aligns our remuneration with the success or otherwise of the portfolio that we manage for them.

Whilst we are not presenting our investment proposition (we call it Wealth Management) based on past performance, it still makes sense that our remuneration is linked to success (or otherwise).

A fellow IFA (not based in the South East of England and therefore not a direct competitor) recently described her firm’s charges as follows;

“Initial fee £1,500 plus implementation fee of 3% of the first £100,000, 2% up to £250,000 and 1% above that”.

A comparable cost from us would be £2,500 initial fee plus £895 for an implementation of say a pension plan.

So for someone investing say £250,000 our fees would be £3,395 compared with £6,500 from our fellow IFA based on her charging structure described above.

Some IFAs do not charge any initial fee but only a percentage of the money to be invested; 2% of £250,000 would amount to fees of £5,000.

We remain confident that explicit charges still represent value for money and total transparency for our clients.

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