Should clients be charged the same way in accumulation as they are in decumulation? The majority of advisers still use percentage charges in the run-up to retirement, and a new study – the subject of our cover story this week – suggests that the market plans to keep them in place for decumulation for some time to come.
There is a compelling argument that ad valorem charging is not in the interest of some clients post-retirement, when it would have been in the accumulation phase.
Imagine an individual with no spouse, family or dependants. They don’t want to give anyone their hard-earned money when they pass away, not even a charity. They want to enjoy life while they can. Maybe they prescribe to the belief that the last cheque they should write should be to the undertaker, and that it should bounce.
A pure percentage model also provides a disincentive to steer wealthy clients with plenty of assets elsewhere towards sufficiently aggressive drawdown. As pot values fall, so do the fees the adviser makes, so there can be a conflict in recommending a course of action that would leave you out of pocket.
But how big a sub-set of decumulation clients are these types of individual really? Much more common is that, by sticking to an ad valorem charging model post-retirement, advisers will see a slow bleed in fees for the same work, if not more work, when complex tax and estate planning comes into the picture, and are actually left poorer than they should be.
Undoubtedly, more advisers will begin to move more towards fixed or hourly charges for decumulation work though. The increasing levels of sophistication with which firms can monitor costs can ensure they know exactly when they aren’t getting paid for the work needed, or when a percentage fee isn’t actually adding value to the client. (See examples in our story of advisers reducing the frequency of review meetings while keeping ad valorum structures for some clients.)
It is perfectly understandable that advisers are looking over their shoulder at the noises the FCA made in its review of the asset management sector that position it towards an all-in fee model which is more closely aligned with fixed fees, and this will surely speed up the trend.
But the answer to how decumulation clients should be charged is, as with pretty much everything else in advice: it completely depends on what the client wants. Tell them why you are charging them how you are, and why that offers them the best value, and everyone can retire happy.