For all the question marks raised over ad valorem fees in recent years, there is a reason that the majority of advisers still charge on a percentage basis.
Clients feel reassured that their advisers’ interests are aligned with their own.
On the face of it, this sounds fair too; if I make money, the person who helped make me it should be entitled to a slice of the cash.
Let’s leave aside the argument that percentage fees can, in theory, incentivise advisers to take elevated risks with client portfolios, since their pay is aligned to the size of the pot. Let’s say, for now, that ad valorem works in accumulation.
Can we say the same for decumulation though? Can we say it in a post-freedoms world where drawdown is now the default option?
There are a whole host of tripwires when it comes to how advisers should charge for clients actively winding down their savings.
On the one hand, clients could argue that their adviser has no interest at all in helping them spend their hard-earned cash in retirement, knowing that every pound their pot falls by hits their planner’s income. But on the other, changing to fixed-fee, time-costs or modular service charges means these will represent a greater and greater proportion of their pension as it decreases in value.
Advisers have their own dilemmas to contend with. On a percentage charging basis, they might see their fees decreasing just as the client’s needs become more and more complex and time-consuming. Clients are living longer, but that means they may be vulnerable for longer too.
Suddenly, an adviser might find themselves throwing in inheritance tax planning, wills and trusts, later life advice, and maybe some equity release too, all the while getting paid less and less for this.
Yet how can you time-cost such taxing work, and how can you justify taking such a large chunk of the pot as fixed fees to the client and their family? That’s not a position planners want to find themselves in.
Just as clients need security that their pension investments will last their lifetime (if that is in fact what they want), they need to have confidence that the financial planning business they trust won’t go under or run into difficulties just when they need it most.
Each client, each circumstance and each planning firm is different. Communication between all of them, and the regulator, will be vital going forward. But just as advisers have in the past, there is no reason they cannot overcome this area of increasing complexity too.
Justin Cash is editor of Money Marketing. Follow him on Twitter @Justin_Cash_1