I was at a dinner earlier this year discussing the future of adviser businesses, when the person next to me mentioned they had recently transitioned to a flat fee model.
“That’s interesting,” I said. The flat fee model is something I struggle with. Conceptually I like the idea, but I have not been able to develop a robust enough model that would work for all my clients. “Please, tell me more.”
“What I realised is that I don’t have to charge all clients the same fee,” said my fellow dinner guest.
It was an excellent point and brilliantly simple. Perhaps my difficulty has been in trying to treat all clients the same, or at least have a set of rules and a repeatable process when calculating the fee. “So how exactly does that work?” I asked.
“It’s simple,” came the reply. “All I did was take the percentage-based fee I received last year and agree to charge the same amount this year.”
I was gobsmacked. Should I admire the chutzpah and simplicity of the solution or should I listen to my gut, which was telling me this was wrong?
A few months on and my gut is winning the argument. There is no doubt in my mind that we will see a shift toward a fixed fee environment. It will be very gradual at first, no matter how loudly the current proponents shout, but it will reach a tipping point and then the shift will be swift.
Today, the pioneers are testing their various fixed fee models and not all will survive. Some will fail because they will not be able to weather all economic storms and others because they will not survive the transparency that fees bring. My fellow diner’s model will not last long, I am sure.
Personally, I think the argument for fixed fees over percentage based fees is an unnecessary distraction. The bigger issue is transparency and our reluctance to openly publicise our charges. Consumers find the lack of transparency more intimidating and frustrating than whether it is a percentage or fixed fee cost.
It is intimidating because they have no idea what they are letting themselves in for when initially contacting an adviser. They do not want to speak to us directly just to discover what it might cost but that is exactly what we make them do. What it costs is a mystery until they bare their financial soul to us, which puts them on the back foot. It is a scary prospect.
I have been listening to those advisers banging the drum for fixed fees but when I visit their websites I have not a clue how much they charge. From the snippets I have gleaned here and there, fixed fees do not equal lower costs. In fact, the opposite seems to hold true, with clients being terminated for not meeting minimum criteria.
Don’t get me wrong, I do not publish fees on my website either. I have tried but it was not a success. My enquiries took a dip, so I stopped. On reflection, though, I could have added more context to better demonstrate value for money. I think I will try again.
Dennis Hall is managing director of Yellowtail Financial Planning