Us advisers love nothing more than ranting about each other’s fee structures online. And with the recent news that St James’s Place have been forced, by Consumer Duty, to row back on some of their more controversial practices, we’ve gone into overdrive.
An adviser writing about charging methods is a bit like going for a swim in shark infested waters while wearing Lady Gaga’s meat dress. You invite the ire of keyboard warriors on all sides of this essentially-boring-yet-somehow-charged-with-emotion debate.
Why though? If you, as a business owner, have a charging structure that is profitable, acceptable to regulators, your moral compass and - most importantly - your clients, then that’s great. So why do some advisers love to criticise their peers so much, and who is it for?
There is a danger of echo-chamber thinking, where these discussions play out between advisers without stopping to consider what clients actually want and, err, asking them. The current narrative seems to be that percentage or ‘asset-based’ charging is bad and fixed fees are good. So, I was really interested to read a recent comment from Nextwealth MD Heather Hopkins that their research indicated “advised clients prefer asset-based fees”. Seems a lot of people forgot to ask the most important people what they think.
Now, I have no real skin in this particular game. As a tiny boutique practice, we have the luxury of flexibility. We can bespoke our fee and service agreements more than most, and we operate a whole range of charging methodologies, depending on discussions with clients about what works best for them. I can confirm that some clients do prefer asset-based fees.
In initial meetings I try hard to educate clients about the options. This is very important in an industry that has traditionally been reluctant to give proper clarity on costs and value (arguably still is, despite being dragged kicking and screaming into the light by MiFID II).
“The idea that everyone benefits from having a financial planner is a disingenuous one.”
In many ways it doesn’t matter how we collect our fee. They are all related back to the complexity of a file and the amount of time spent on it as part of the review process, which is clearly identifiable. I’m wary of cross subsidy across the client population leading to unfairness. I’m also wary of the risk of bad outcomes under any charging method. The minimum costs required to offer a quality regulated review process are frustratingly high, and minimum fees can be disproportionate for clients of smaller means. In this context, the idea that everyone benefits from having a financial planner is a disingenuous one. For some, the undoubted benefits are outweighed by the costs.
Equally, asset-based fees on large portfolios can create fee anomalies which are compliant, affordable to the client but morally wrong. ‘Decency limits’ - a term I find vaguely hilarious - help. I suggest that scientifically arrived at caps and collars are better.
But the bigger point is that we all need to understand and accept that no method is perfect. They all have risks of bad outcomes for clients, and potential conflicts of interest. For example, there seems to be a perception that fixed fees and pure time costs are somehow more professional. We look to accountancy and legal models and assume they operate on some moral higher plane. But I’ve worked in these businesses and seen the potential for files to get padded to rack up billable hours (‘file familiarisation’ anyone?). I know a lot of lawyers, and I doubt any of them would recommend traditional law firm billing as something to aspire to.
In the end, it comes down to culture
We all know it’s possible to be both compliant and unethical. It’s wrong to assume that a firm operating one charging method over another is automatically better or worse than another.
We need to be better, I think, at asking clients what they want instead of telling them, and paying attention to research that challenges our perception of what good looks like to the end user.
We should focus on educating clients about the relationship between cost and value. Whenever I talk to a prospective client, I begin by making sure they understand that advice is an expensive route into investing. It can be tremendously value adding, but not for everyone. All investors should understand the role which every line of cost in their arrangements plays. Ideally every layer added should be easily identifiable and easy to remove if necessary. From planning/reviews to platform to funds to investment management (yes, I mean you, product bundlers and exclusive share class peddlers).
Consumer Duty has been a good catalyst in this area, but advisers still play an important role in helping clients understand value assessments, because things still aren’t nearly as clear and accessible as they should be.
Personally, I think if you do all this and get it right, and you keep client outcomes at the heart of things, your charging methodology becomes a much smaller part of the discussion.
