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Danby Bloch: Is percentage charging best for your firm?

Forty per cent of advisers have reviewed their charging structure in the past six months, according to research by Platforum.

The reason is not hard to find: regulation, and Mifid II in particular.

But what is interesting is that, so far at least, advisers do not seem to be making changes to how they charge.

A fascinating insight into adviser charging is available in the FCA’s Data Bulletin 13, published in June this year following a previous review around the same time in 2017.

Every owner or manager of an advice business should take a look at this free data. It is the easiest way to find out what has been happening in the market and to benchmark charging practices. That said, there is a bit of a lag. The data shows what was happening with charging last year, pre-Mifid ll.

Keith Richards: Contingent charging must be preserved 

The predominant approaches relate charges to assets under advice, either directly or indirectly, especially for ongoing advice and service. The larger the firm, the more likely it is its charges are based on a percentage of assets under advice.

The first development to note is that between 2016 and 2017, advisers’ total revenue from adviser charging shot up by an impressive 27 per cent. The bigger increase came from ongoing rather than initial charges.

The structure of making initial charges at the start of a relationship or for one-off work or when new money comes into a portfolio is widespread, with levels ranging on average between 1 and 3 per cent. Ongoing charges for continuing advice range on average between 0.5 and 1 per cent.

The challenges of Mifid ll lie in the requirements to make the charges more explicit and salient, with advisers having to provide estimates of future annual charges and then account for actual charges once they have been taken. There is also generally much more of a burden on advisers to demonstrate value and to provide the promised services.

Danby Bloch: Centralised retirement propositions do not mean uniformity of outcomes

So how should advisers be reassessing their charging processes in the light of these developments?

First of all, there is the question of whether the percentage charge of assets under mangement is a satisfactory basis for determining how much clients should pay. Of course, a few advisers do not charge on this basis.

The concerns about AUM based charging are real and can present problems for both advisers and clients. The main ones are as follows:

  • The charges do not always relate to the amount of work done. The affairs of a client with a large portfolio might be simpler and easier to deal with than those of a much less wealthy client, so the rich client may be overcharged and the poorer client may pay too little. In one firm, a recent comparison between time actually spent on clients and AUM charges paid revealed larger clients were being charged about the right amounts but small clients – where fees were under £1,000 a year – were being substantially undercharged for the levels of work done.
  • From year to year, the amount of work for a client can vary considerably but the fees stay pretty much constant, just going up or down with the value for the portfolio.
  • From a firm’s point of view, there can also be a mismatch between its costs and the investment market values on which it bases its charges. Its regulatory or other costs could leap just as its income falls in a bear market.

The arguments for AUM based charging are as follows:

  • It is simple
  • Clients accept it (most of them certainly do not seem to like time-cost based charging)
  • It generally reflects the value of the work done and the extra responsibility of looking after a larger portfolio.

The reality is that this will be the basis for most charging structures, especially among larger firms, but there are a range of different methods to supplement that, especially for initial and one-off charges.

So, here are the areas where advisers should look to review their charges:

  1. Should there normally be a minimum charging level for clients?
  2. How well are you monitoring levels of work in relation to charges made?
  3. What are the levels of AUM at which you tier percentage charges? How often do you revise them and what basis?
  4. Should you charge extra for certain fixed services such as tax planning or cash flow modelling, or is it part of the core proposition? If so, should you cut the percentage charges?
  5. If you outsource investment management, should you adjust fees accordingly?
  6. How should you treat new money coming into a portfolio? Is it an opportunity to charge more or should it be treated like any other increase in a portfolio’s value?

Money Marketing will be holding a panel session with leading financial planners on how to decide on the right fee structure at the Money Marketing Interactive conference next month. To secure one of the last available places, register now.

Danby Bloch is chairman of national advice firm Helm Godfrey and consultant at Platforum


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. I find it hard to understand this obsession with percentage charging by advisers.

    Stockbrokers charge by percentage and always have done and they don’t seem to be agonising over this, nor does the Regulator seem to comment on it.

  2. Obviously Danny Bloch’s firm doesnt charge %’s .
    I cant find their charges on their website

  3. What is the obsession with our charges? doe s ayone wish to give us credit for increasing our clients wealth. I reviewed a client yesterday who has enjoyed an increase of 75% since 2009 in a low risk environment, advise worth paying for in my opinion!

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