I was talking with AJ Bell chief executive, Andy Bell, recently about fees. I’ve long been a fan of his and was curious to hear about the naysayers he’d encountered as a fledgling Sipp provider with a product costing a fraction of other Sipps at the time. I wondered if his experience could help me crystallise my thoughts about various competing fee models that are exercising my mind.
Later I caught the train back to Exeter and had a couple of uninterrupted hours thinking about what we’d discussed. I channelled my inner Carl Richards (author of The Behaviour Gap) and created a sketch to encapsulate my thoughts, reproduced here.
The big shift for me came from Andy reframing my angst about low versus high cost or ad valorum versus fixed fees, by suggesting we’re basically looking to charge in a fair way, whilst at the same time keeping things simple.
Complexity arises when you try to hide just how expensive (or unfair) the charges are, but it also becomes complicated when you ask people to pay only for what they use. The fairest charging structure would itemise all the individual components and charge according to usage – that is charges for time spent, pages printed, postage costs etc. The pricing menu would be complex and a real turn off.
I know this to be true because I recently engaged an architect who ended up charging me for each meeting and for each printed A2 diagram, and for anything else they could identify and charge for. I found myself becoming increasingly frustrated and uncomfortable and began questioning whether any of the meetings were necessary. It might have been the fairest way to charge, but I hated it and I sacked the architect. I now understand the client who did the same to me several years ago when I proposed a charging structure that was both lower and fairer than the ad valorum fee he’d been paying elsewhere. Don’t underestimate the power of simplicity.
AJ Bell’s charges combine both aspects, a charge based on assets under management and a menu of charges for things like trading, valuations and drawdown. The difficulty with menu pricing (apart from the complexity) is it is very hard to inflation-proof. There is resistance each time charges need to increase.
When I initially drew the diagram, I imagined the sweet spot was going to be at the base of the curve, but it isn’t. A fair charging structure is going to involve some complexity and the extent will depend on the type of work you do and the types of client you work with. Somewhere along the curve there will be an optimal balance between fairness and simplicity. Wherever you place the ‘X’ there is going to be compromise.
I’ve used this chart a couple of times with clients/potential clients to explain our approach to charges, and it’s been well received. I’ve found that the fee conversation, when framed in the context of fairness versus complexity, becomes easier. OK so it’s a small sample set, but the shift has been to move conversations away from price and to talk about what is fairness and simplicity.
Dennis Hall is managing director of Yellowtail Financial Planning