A debate around whether advisers should charge fixed fees is re-emerging but, warns Arnie Millington, Head of Business Development at Sparrows Capital, the industry shouldn’t change solely due to external pressures.
The debate about fixed fees in the financial services industry is rearing its head again, but it isn’t the solve-all solution people might believe it is.
From a consumer’s perspective, the very idea of a fixed fee might sound compelling, because they know what they are going to pay.
But it isn’t that simple.
Just because a fee is fixed, it doesn’t mean it’s fixed at the right level. Fixing also ignores the issue of clients with potentially vastly different net worths paying the same fee, or cross-subsidisation
And, even if a fee is fixed, does it represent good value, and does it cover the risk inherently linked to every client portfolio? The risk taken for each client can differ vastly depending on segmentation, and that is what providers are being rewarded for; risk.
Reassessment required
The FCA’s Consumer Duty framework has inevitably prompted everyone in the investment supply chain – from advisers through to discretionary fund managers and asset managers – to analyse their charges.
But Consumer Duty is not about everyone charging the lowest possible price, it’s about being able to establish value for money.
And the business model of a financial adviser is significantly different to that of a discretionary fund manager or even a platform.
For example, we are able to cap fees on our own MPS range at a nominal £20 per month per client irrespective of the amount of assets per client.
This is because our risk is capped and we believe once a client’s portfolio is over £240,000, we don’t need to charge more than that capped fee level.
But that isn’t the case for advisers.
Balancing risk
Financial advisers are inherently exposed to more risk with each client as each individual portfolio grows in size.
There’s a greater level of professional indemnity insurance required for starters, and then there’s increased market risk because a client with a larger portfolio will have a greater sum of money invested than someone with a smaller pot.
And then there’s the wider work of managing a client who has more money; whether that be more vigorous tax planning, more complex estate planning, or there could be more intricate future scenario modelling required.
As such, we would argue that percentage-based, or ad valorem, fees make sense for advisers, and that the advice industry should be wary of anyone who is not an IFA advocating that advisers should use fixed fees.
Interestingly, recent research by Citywire’s New Model Adviser showed that just 1.3 per cent of advisers are charging solely fixed fees for ongoing advice.[1]
The number experimenting with both fixed and percentage fees rose to 14 per cent.
Forging your path
Ultimately, advisers must pursue the fee model that is right for their business, and their clients. They should not feel pressured by the returning debate that’s happening around them that propagates fixed fees as a panacea.
For advisers who offer comprehensive financial planning, it’s perfectly legitimate to use a percentage fee model, and often these benefit clients with smaller pots.
Some might feel a fixed fee for an initial assessment makes sense, and some might believe that removing the connection between fees and assets is logical because it eradicates a conflict of interest.
For instance, would an adviser be disincentivised to support a client’s request to withdraw a large lump sum if that reduction in AUM would hit the adviser’s income, but that same adviser be agnostic if they were earning the same amount through a fixed fee regardless of the size of a client’s pot?
Whichever side of the debate you are on, justification is the key metric here. Whatever you charge and however you do it, as long as you can demonstrate why you do it that way, then there should be no problem at all.
[1] https://citywire.com/new-model-adviser/news/revealed-just-1-3-of-advisers-have-abandoned-percentage-fees/a2436584
