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How does your charging structure compare to peers?

A look at real-life average minimum charges provides a helpful guide as to whether advisers should re-evaluate their fee structures

Working out a robust charging structure for an advice firm is tricky, particularly as there is no prescribed methodology. However, there should be a logical process to it.

The number one question to bear in mind is whether it is fair, clear and not misleading. Because, when it comes down to it, that is what the regulator is expecting. So, where to start?

Thorough analysis
The first stage is to get a feel for the client bank by splitting it into high-, medium- and low-net-worth segments, then broadly numbering how many sit in each. Table A shows how a firm may split this.

This serves two purposes: it helps when pegging charges to ensure they are fair and it helps in making a judgment on the adviser’s capacity for adequate service.

Next, determine how long it takes to complete the initial and ongoing advice process, taking Hofstadter’s Law into consideration that “it always takes longer than you think to complete a task, even when you know it takes longer than you think”.

Once you know how long in hours, multiply by the firm’s hourly rate (FCA Data Bulletin Issue 7 states the most common hourly rate is £150).

Minimum charges
We recently analysed the results of 86 consultancies to see what real-life minimum charges looked like.

Table B collates the time taken to conduct the initial advice and the ongoing advice process. This is the amount of time an adviser can charge as it relates directly to the advice process. Table C takes the time taken and applies an hourly rate of £150.

Table D assumes an initial charge of 3 per cent and an ongoing charge of 1 per cent (these percentages are the maximum investment rate shown in Data Bulletin Issue 7). The figures show the investment required in order to meet the charge. For example, if an adviser’s initial charge is 3 per cent (minimum £1,716), an investment of £57,200 will generate £1,716.

Fair and clear?
Using this analysis can help a firm establish whether their charges fit with their client bank. In the example in Table A, 99 out of 113 (89 per cent) invest more, so the charging structure could be considered fair.

The next area to explore is clarity: can the charging structure be easily explained to clients?

Each method of charging has advantages and disadvantages; there is no perfect solution. However, it should always lead back to two key factors:

  1. Charges should be clear, fair and not misleading
  2. Charges should take into consideration regulator expectations

Do that, and document it correctly, and you are well on track to having a robust charging structure.

Karl Dines is head of business consultancy at The SimplyBiz Group


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. just charge by the hour . . . .

  2. I agree with the fair, clear and not misleading charges. I’d also add, that applying a mental decency/indecency barrier hen working on flat percentages is important.

  3. Hey guys, gals and others, just publish your charges on your website. I am sure that good value is offered and transparency takes away the thoughts of being ‘hood winked’

  4. I take it Karl you are employed ?

    You charge in relation to your business, and the costs that that business incurs

    What a stupid article

    We all disclose our costs on various different mediums, ….duuuurrrr it’s called disclosure …it been around for years …

    What next ?
    Having our client count out pounds shillings and pence our fees on the kitchen table like some Neanderthal?

  5. Clients have to contribute to the overall running costs of the business, including the profit margin required by the business owners to fund their preferred lifestyles, otherwise why be in business.

    It is possible and preferable to be able to segment clients in terms of service levels, but a fair price for one firm will differ to another, consider location, number of support staff and systems, availability of highly qualified staff etc, these all have to be paid for.

    Price is one element of the Marketing Mix, along with people, place and promotion. Clients can decide for themselves if they want to pay for a prestige office or well promoted supposedly upmarket company, and may well gravitate to successful business people like themselves, expecting to see the trappings of success, the holidays and the cars.

    As far as the Regulator is concerned, they have bigger fish to fry, and whilst we are mindful of fairness and decency, let clients decide if they wish to do business with us.

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