How advisers charge their clients in decumulation has come under the spotlight as fresh research points to a need for reform.
Consultancy The Lang Cat and CWC Research asked how advisers they see their fee models changing for decumulation portfolios. The research included 80 advice firms, 14 asset managers and 30 discretionary fund managers.
Three quarters said they don’t see their decumulation fee model changing at all, which was an increase from 64 per cent when the research was last carried out in 2015. The proportion who thought there would be a minor change dropped from 20 per cent in 2015 to 14 per cent this year. Those who thought there would be a major change ticked up slightly, but was still under 5 per cent.
The research also asked if firms have a minimum portfolio size for retirement advice. The report acknowledges retirement advice is complex and the need for advisers to cover their costs can act as a “natural floor” for the clients they take on.
The majority of firms did have a minimum portfolio size, with 60 per cent putting it at £100,000 or above and 34 per cent saying it is £200,000 or above. Six per cent said they have a minimum portfolio size of £400,000.
Some minimum portfolios can be set even higher, with one respondent saying they have set a new client minimum at £1m.
Another said they do not have a minimum but for the fee to be justified in terms of the value the client will get, their needs must be sufficiently complex. The portfolio size ends up being around £180,000, the adviser said.
Presenting the results last week, CWC research director Clive Waller said there are two things that need to change at the decumulation stage: the investment proposition and charging. He said: “This is an issue the regulator has got to address. Where advisers are advising on complex things – inheritance tax and trusts – that is financial planning and that’s fine. If they are advising on an annuity replacement, costs have got to come down.”
The report says while adviser fees of around 1 per cent for a drawdown portfolio can feel high, particularly where the client is receiving 4 per cent income, many advisers said that fee level is too low given the complexity of the work.
Interviews as part of the research suggest the major change in fee models at decumulation that is being considered is a switch from ad valorem charging to a fixed fee.
One respondent said they “may move to fixed fee as it’s difficult to take a percentage on a decreasing fund” and they “need to also watch the withdrawal rate”.
Another said they are “trying to move away from percentage fees to annual fees reflecting time and work rather than fund size”.
Cervello Financial Planning
There’s an argument to seriously consider how we charge fees not only for decumulation clients but also for clients who are in the accumulation phase and we’re currently managing a move in our business away from ad valorem towards a fee which fairly reflects the body of work we take on.
Regardless of how we charge the fundamentally important thing is to ensure that we are fully transparent and the cost of advice fairly reflects our value as professionals. Interestingly, our corporate clients wouldn’t consider paying for our service any other way than a fairly reflected initial fee (and then retainer) arrangement and we’re seeing a move towards individual clients in their conversations with us happy to pay for a similar type of service.
However fairness and transparency to me from the perspective of the professional planner and the consumer is far more important than the actual method of payment and this is why we have a dialogue with our clients about what we charge as well as the value we feel we continue to add.
One individual that took part in the survey said they might have to introduce a “floor” because of how percentage charges reduce with amortisation.
Another said they would reduce fees for smaller clients but move to triennial reviews and also look to introduce technology, such as Skype meetings, to reduce costs.
The Lang Cat principal Mark Polson says any shift away from a percentage-based fee model was also based on a perception that this model was becoming unpopular with the regulator.
He adds: “When you talk to firms working on a fixed-fee basis, one of the things that happens is there is a detachment from the fees you charge and what the load is on the portfolio.
“There is a real swings and roundabouts thing here. There is a nervousness about servicing those fee amounts; everyone is used to dealing in percentages, it is how the industry works so why disrupt it.”
Polson says the research showed not only do firms not change their fee model but they also don’t change their investment approach at decumulation.
He says: “We are challenging if that is right. Have we boxed ourselves in with this cookie-cutter sense of what suitability is so that nobody wants to change anything because there is now so much invested by firms into [centralised investment propositions]?”
The researchers predict that “centralised retirement proposition” products will emerge from providers to target those customers going into drawdown who have relatively straightforward needs.
When you talk to firms working on a fixed-fee basis, one of the things that happens is there is a detachment from the fees you charge and what the load is on the portfolio
Polson says he is surprised there have not been more of these packaged products released to the market already.
He says: “There is a market for people to have bespoke solutions in the same way as in pre-retirement, but there are clients who might want to benefit from drawdown rather than an annuity who have relatively straightforward needs. One of the things that strikes us as unusual is that the market has not rushed to fill that gap yet.”
Polson adds: “If you have packaged products…they are easier for the adviser to look after and the potential is for the total cost of ownership to come down. It is all contingent on the supply-side of the industry getting its act together.”
However, the report warns that any such products would need to be chosen in the interest of the client and not the firm.
Keeping faith that fees are fair
Advisers speaking to Money Marketing who use ad valorem charging in decumulation said they do not plan on changing their fee model.
Rowley Turton chartered financial planner Scott Gallacher says his firm charges a 0.60 per cent ongoing fee in decumulation, which it believes is a level that is not a huge drag on client portfolios and the firm can return value.
Gallacher says: “Most of our clients, even if they are in decumulation, are probably not decumulating. They are probably just accumulating at the same rate. Most of them would be spending the income and a bit of the capital growth. A lot of our clients would not be looking at eroding their overall wealth over time.”
Combined Financial Strategies chartered financial planner Jonothan McColgan says his firm’s fee model is a minimum fee, a maximum fee and then a percentage in between.
He says: “The amount of hours it takes to generate simplistic advice, you have to cover that cost in any transaction. I don’t think the percentage should continue indefinitely. I am a small business so having a cap on my fees will attract a certain kind of client I am trying to get.”
McColgan does not agree that an advice firm’s fee model should change in decumulation.
He says: “You pay for advice. You are not paying for accumulation or decumulation so the fees will be the same. Why should you benefit from lower fees in decumulation than those who are in accumulation? Is that not charging younger people more than older people so you are just cross-subsidising?”
Cavendish Ware associate director Roy McLoughlin agrees: “Our theory is: what has changed? In accumulating the money there is a need for advice and there is a need for the ongoing. In decumulation it is exactly the same. They are slightly different scenarios but the principles are the same. Most people have that consistent model.”
McLoughlin adds there is an argument that a client’s advice needs increase in decumulation as they move into alternative retirement strategies and need advice on care needs or complex tax planning. This is something Altus retirement strategy head Jon Dean agrees with but he says it is important to remember
the impact a fee model might have on the sustainability of the drawdown pot.
He says: “In many ways the client’s needs are maybe more complicated than before. I can see a valid argument that says advisers could justify charging more for in-retirement advice than in the accumulation phase but that is not to say that is what clients want.”
Advisers interviewed by Money Marketing say it is not common for clients to ask if their fee model would change once they reach retirement.
Gallacher gives an example of one client who queried the fee model and it was changed.
He says: “After discussions back and forth we proposed changing the fee model for the client but we were not looking to reduce the overall fees because we felt they were fair.”
Dean says advisers should have the same kind of discussions with clients about fees in decumulation.
He says: “Advisers need to have an honest discussion about charging structure at retirement and ensure that the arrangements in place before are still the most suitable in drawdown. These must represent value for money and be payable in the way that best suits their clients, which may be different for different clients.”
The key issue is value for money
Decumulation planning is becoming a key part of many advisers’ work for clients and it is set to become even more important. So it is not surprising that charging structures and rates have become issues of great interest and even controversy.
Most advisers charge according to the value of a clients’ assets under advice, but a fair few make fixed charges and a smaller minority charge by the hour. And then there are advisers who have a mixed menu of value-based, fixed and sometimes hourly charges.
An increasing number of advisers are checking how much time it takes them to deal with individual cases – and new technology helps them to do that with relatively little pain. So many advisers have a pretty keen idea of their costs whether they operate fixed or value based charges.
Advisers who operate a simple value-based charging structure mostly have a minimum size of portfolio they will deal with. Those who charge a fixed fee or charge by the hour generally have a minimum fee level. A few don’t – or say they don’t. In any case, advisers tell us they sometimes make exceptions, for example, for the family members of a good client. And value-based charging advisers might switch to another form of charging method for a client with a relatively small portfolio but a complicated planning problem – as long as the adviser can add value. Adding value is the big challenge for advisers, especially where the problems are complicated and the value of the portfolio is low. Part of the solution will be a lot more use of tech, with robo features increasing adviser productivity.
But as clients get older and drawdown runs the value of portfolios down in the longer term, the prob-lem of proportionately higher fees in relation to client assets will grow even more acute. So, for example, even 1 per cent fees may well turn out to be too low for some late inheritance tax planning towards the end of a client’s life. The issue is to ensure the fees still provide value for money for the client.
Danby Bloch is chairman of Helm Godfrey