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Are retirement advice fee models ‘broken’?

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Advisers are split over claims the charging models adopted by the majority of firms are “broken”.

A wide-ranging study, produced jointly by consultancies CWC Research and The Lang Cat, found while the proportion of advisers charging flat fees has risen from 1 per cent two years ago to about 10 per cent today, most still price on an ad valorem basis for ongoing advice.

Some two-thirds of advisers say they do not expect to change their fee model for decumulation portfolios, while a fifth say they could make minor changes.

The report warns percentage-based charges could be unsustainable for clients taking an income from their pension pot because they “don’t necessarily need full advice on matters such as wealth preservation and inheritance planning”.

CWC Research managing director Clive Waller points out a 1 per cent charge combined with a 4 per cent withdrawal rate equates to the adviser charging 25 per cent of the client’s income.

He says: “One-off fees are tolerable but if they are ripped out every year in retirement they can look horrible. That potentially raises TCF issues. The current in-retirement fee model is broken.”

Syndaxi Chartered Financial Planners managing director Robert Reid says the FCA is placing retirement advice charges under greater scrutiny in the wake of the pension freedoms.

He says: “Ad valorem charges can look very scary when you consider them in relation to income in retirement. It is a frightening level of charge and the issue has been ignored by a lot of people.

“Ultimately it will be consumers who force the industry to change because people just won’t be prepared to pay that level of charge on an income withdrawal.”

However, Informed Choice managing director Martin Bamford argues advisers charging percentage-based fees can still offer value for money.

He says: “There’s nothing unsustainable or broken about retirement advice fee models. When we charge for our retirement advice on the basis of a percentage of funds under management, it always represents excellent value for money.

“Using emotive language about fees being ‘ripped out’ of retirement income does nothing to explain the value the best advisers bring to the table at such an important stage of life. Delivering highly regulated professional advice comes at a cost which studies such as these conveniently ignore.”

The report, which surveyed 72 firms (66 of which were advisory), also takes aim at centralised investment propositions in the post-freedoms world. The term CIP refers to standardised advice processes, including model portfolios and discretionary fund management.

Responses point to a “lack of consistency” among advisers when choosing a CIP, says the report. “There are plenty of examples of good practice, where firms are clearly using robust due diligence and selection processes, with the interest of the client and the suitability of the product put first.

“But the number of firms that continued to recommend DFMs only for their most affluent clients suggests the prestige of DFMs still carries a greater weight than it should.

“It’s difficult to set apart the cases where the firm outsources to a DFM because it’s what the client wants or needs, and those where the adviser perceives that the client is suitable for a DFM (and the higher charge that typically entails).”

The report adds: “This raises the familiar concern that a CIP is as or more likely to be employed to benefit the firm rather than the client.”

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Bit of a broad-brush approach to suggest that fee models are ‘broken.’ Advisers should ask themselves:

    – Are we carrying out work that is beneficial to the client and covers our regulatory responsibilities?
    – Are we charging a fee that reflects this work fairly?
    – Are we disclosing this fee clearly to the client?
    – Is the client happy to pay this fee?

    As long as all answers are a yes then there shouldn’t be anything to worry about. I accept that our service isn’t perfect for all investors, who may go to another adviser or direct platform if they don’t feel that they get value for money.

    My only concern is that I still feel that I carry out some work for the regulator’s benefit rather than for the client.

  2. I think you will find it’s a bit more complicated than that (as are many things) Imagine that the drawdown product is sitting on a modern platform with a platform charge of 0.25% and a weighted annual management charge across funds of 0.75% (amend those numbers to match whatever works for you) Should we have an article that says platform and fund management fees take up 25% of the clients drawdown income?

    I agree with Roger Sole’s points I think it also comes down to what is being done for the client and whether the client values that service.

    What if the advisers service saves the client from making some big investment mistakes say to the tune of 2% per year (some published analytics suggesting that might well be doable- see Vanguard Nov 2014 – Putting a value on your value: Adviser’s Alpha in the UK) Do we then see an article headlined “adviser fees save 50% of client’s drawdown income”?

    Like so much these days the focus on price to the exclusion of value seems to dominate a lot of commentary. It really is a bit more complicated than it seeems.

  3. What is clearly shows is the need to justify the level of charges; passing money to a DFM cannot enable a flat 1% charge to be seen as anything other than excessive. In the words of Sam Walton the client can fire everyone from the CEO down with a the speed of information that now exists we all need to see that all models need change either in costs or in the communication of value

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