The case for flat fees
When it comes to platform services, flat fees are the only fair option.
First, they have less of an impact on long-term investment returns. Fees can make a huge difference to the value of an investment over time, especially a larger one.
Looking at a £150,000 investment – assuming growth of 5 per cent a year and a 0.8 per cent ongoing fund charge – after 20 years an investor paying a flat fee of £10 a month could be about £20,000 better off than with a platform charging 0.35% a month.
Second, flat fees are more transparent. Percentage fee providers are effectively changing their cash price to the customer every time money is added and as markets go up and down.
While it might be written in plain sight that the platform cost is, say, 0.35 per cent of the investment, how many customers can work out how much that adds up to in pounds and pence?
Our research found that 32 per cent of investors think they don’t pay anything for investment administration. And of those who knew, 71 per cent did not know how much.
With flat fees, it’s always clear exactly how much you need to pay.
Third, ad valorem charging is essentially a tax on wealth. A platform service is, at its heart, an administration service. It provides tools to select and manage investments, keeps records and completes transactions to order.
It does not cost ten times more to service a £500,000 Isa than a £50,000 one. Equally, servicing a £5,000 ISA is not a tenth of the cost of a £50,000 one. With a percentage fee, customers with larger portfolios are effectively subsidising the smaller portfolios. With a fixed, flat fee, everyone pays the same and covers their own costs.
I can’t understand how anyone in the industry believes it’s fair to charge wealthier customers more for the same service.
From a platform perspective, it just makes sense. Flat fees reflect the costs of the services provided and in a scalable way that doesn’t expose the provider to changes in market value. It makes for a more stable commercial model.
Nucleus business development director Barry Neilson
The case for a percentage charging structure
The tiered, or percentage, charging structure has become the most common across the UK platform market’s adviser-focused offerings, and for good reason.
Percentage fees are far easier to understand, and far more transparent, covering the all-in cost of using a platform annually. Advisers know what their clients are being charged, and there are no nasty surprises lurking in the small print as they go about the daily business of managing clients’ portfolios.
In comparison, the hidden charges associated with some fixed fee platforms are anything but clear.
For example, on most tiered platforms, what you see is what you pay, meaning providers have built in any costs they incur associated with portfolio rebalancing, the cost of encashing a portfolio, moving into drawdown or other similar activities. This provides peace of mind and allows advisers to be as flexible as required when it comes to clients’ portfolios.
However, if you are using a fixed fee platform, the models are typically menu-based and extensive, with fees for re-balancing or other specific events, meaning clients get stung with additional fees.
While they can seem minor, these charges can add up very quickly. For example, if a client held 25 underlying funds, on some fixed fee platforms that could mean 25 charges for selling and then 25 charges for re-buying alternative holdings. These fees erode returns, weighing on gains made by portfolios.
Percentage or tiered fees are also better value for clients with smaller pots as fixed fee models have to work across all portfolio levels so the annual fee is disproportionately high for clients with lower assets and would appear disproportionately cheap for high net worth clients.
Ultimately, proponents of both fixed and tiered fees can produce figures to show how their approach is better value under certain circumstances, but there is a bigger point here about relationships.
Everything about fixed fee platforms is very transactional, with charges for all manner of activities, and this makes advisers and their clients feel like customers, rather than partners.
For us, the goal is to build long-term relationships with our adviser users, with the platform becoming very much a part of their day-to-day businesses, rather than feel like some rented service which can be chopped and changed for a new model at any time.