Report takes aim at ‘broken’ retirement advice fee models

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Adviser retirement fee models are “broken” and firms will increasingly need to switch to flat fee or ad hoc charging structures, a new report argues.

The wide-ranging report, produced jointly by consultancies CWC Research and The Lang Cat, found that while the proportion of advisers charging flat fees has risen from 1 per cent two years ago to around 10 per cent today, the vast majority still price on an ad valorem basis for ongoing advice.

Furthermore, more than two-thirds said they didn’t expect to change their fee model for decumulation portfolios, while a fifth said they could make minor changes.

The report warns percentage-based charges could be unsustainable for clients taking an income from their pension pot because they “don’t necessarily need full advice on matters such as wealth preservation and inheritance planning”.

It adds: “In many cases their requirement will simply be a regular income from their pension pot that is above the level paid by an annuity.

“It could be argued that ad valorem charges based on portfolio size isn’t a sustainable model for these clients.

“The answer might be a bigger shift towards a model that enables a more ad hoc approach, where a fee is paid for specific advice as and when it is needed, just as you might with a solicitor, for example.”

CWC Research managing director Clive Waller points out a 1 per cent charge combined with a 4 per cent withdrawal rate equates to the adviser charging 25 per cent of the client’s income.

He says: “One-off fees are tolerable but if they are ripped out every year in retirement they can look horrible. That potentially raises TCF issues.

“In my opinion the current in-retirement fee model is broken.”

The report, which surveyed 72 firms (66 of which were advisory), also takes aim at centralised investment propositions in the post-freedoms world.

The term CIP refers to standardised advice processes including model portfolios and discretionary fund management.

It says responses point to a “lack of consistency” among advisers when choosing a CIP.

The report says: “There are plenty of examples of good practice, where firms are clearly using robust due diligence and selection processes, with the interest of the client and the suitability of the product put first.

“But the number of firms that continued to recommend DFMs only for their most affluent clients suggests the prestige of DFMs still carries a greater weight than it should.

“It’s difficult to set apart the cases where the firm outsources to a DFM because it’s what the client wants or needs, and those where the adviser perceives that the client is suitable for a DFM (and the higher charge that typically entails).”

It adds: “This raises the familiar concern that a CIP is as or more likely to be employed to benefit the firm rather than the client.”