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Malcolm Kerr: What’s the right approach to ongoing advice fees?


Most advisers share the same objectives: helping clients make the most of their money, while generating a decent income and perhaps some capital for themselves. What never ceases to amaze me, though, is how different their businesses can be.

Firms can comprise one adviser or 3,500. They can be absolutely committed to either the independent or restricted brand. They can be passionately in favour of passive or active funds. And when it comes to technology, there are clear divisions between leaders and followers.

Fee models are another area where opinions are divided. The FCA’s recent Retail Mediation Activities Return Data Bulletin found about 48 per cent of firms were in the ad valorem camp. We understand this is because clients seem to like the concept and advisers take comfort from the fact the size of the initial fee is aligned to the risk attached to the advice provided.

Interestingly, about 22 per cent of firms now charge fixed fees based on the work required, 20 per cent offer hourly rates and 10 per cent a combination of both. Unsurprisingly, 81 per cent of initial fees and 74 per cent of ongoing fees are facilitated through providers and platforms.

The bulletin reports an average annual “productivity” of about £92,000 for firms with just one registered individual, ranging to about £124,000 for firms with over 50 RIs. Perhaps one should increase these numbers by about 50 per cent to reflect the ongoing fees that would be coming in.

But how much does it cost to generate this revenue? And are the fee rates adequate? The bulletin identifies the most common hourly rate as £150.

When calculating fee structures and rates, firms need to understand how much it costs to deliver their service. But many do not have a grasp on it. The underlying assumption is that the fee earners have to generate sufficient revenues to at least cover the costs of the business and some profit margin.

When it comes to technology, there are clear divisions between leaders and followers

Let’s take a firm with 10 advisers, total costs of £1.5m and a profit target of £300,000. This firm would need average initial and ongoing fees totalling £180,000 per adviser.

If we assume a 48-week year, allowing for public holidays and vacations, and that some three days a week are available for direct fee-earning activity, with the adviser working eight hours a day, we get a potential 1,152 direct revenue-generating hours. So, the amount necessary to achieve the revenue requirement is about £150 per hour: the most common hourly rate reported in the bulletin.

Let’s put this cost into the perspective of offering ongoing advice. If the commitment is to provide two face-to-face meetings each year plus other services, we are looking at a minimum of four hours per annum per client. So, the cost of that is £600.

At 50 basis points, this implies the minimum client portfolio for an efficient firm is about £120,000. For the initial advice on a £120,000 investment, the fee is likely to be up to £3,600. So there is plenty of margin available provided the entire process takes less than 24 hours. All good – unless advisers are seeking to serve less wealthy clients.

The only cloud on the horizon is that the fees for an ongoing service based on a percentage of the investment can look heavy when the client is drawing income, particularly when the investment management is outsourced. In that case, we have the adviser, the DFM, the asset manager and perhaps a platform all taking a slice.

But advisers tell me the annual fee is not just about investment management. Indeed, an increasing number focus on financial planning. Some charge flat fees or hourly rates and many provide a report showing the value they have added in terms of tax saved and so on.

If the investment management is delegated to a third party, ad valorem fees are not ideal. Not least because they imply the client’s financial planning requirements remain constant.

Also, there is a potential conflict of interest here. Many transaction valuations are based on what used to be called trail commissions and are now referred to as ongoing advice fees. Replacing these with something different could have unintended consequences.

It is worth considering a fee structure that could be better aligned with the interests of all parties. First, a smaller percentage adviser charge to reflect the ongoing risk inherent in the relationship, with a minimum underpin. Second, an hourly or fixed fee applied to time intensive work outside the standard ongoing service agreement.

Advisers need to ensure not only that clients understand what they are paying for in terms of an ongoing service and what they can expect to receive, but also that the service remains suitable for their needs. And, of course, they need to evidence what has been promised is actually being delivered.

One benefit from moving away from a purely percentage-based approach is it mitigates the reduction in adviser income when markets fall.

Even more important, if clients are in drawdown and the plan is to reduce capital over time, the ad valorem fee income will go down whereas fixed fees can stay level or even increase with inflation.

The FCA Data Bulletin describes a profession with a wide range of propositions that will accommodate diverse client requirements and preferences. In other words, a healthy market that seems to be working very well. And given that the demand for professional and objective advice looks set to increase, the best is yet to come.

Malcolm Kerr is senior adviser at EY



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There are 4 comments at the moment, we would love to hear your opinion too.

  1. “One benefit from moving away from a purely percentage-based approach is it mitigates the reduction in adviser income when markets fall.” Yes, but when market values fall, a fixed fee, as a percentage of the value of a portfolio INCREASES and, by impeding recovery, does so at the worst possible time.

  2. This is all very well. However, adviser time costs are only part of the overhead. To come to any sensible understanding of the business model, you need to include the salaries of all the office staff, para planners, compliance, PI premiums, regulatory levies and research costs.
    What non-adviser costs formula has Malcolm Kerr used in arriving at his determinations?

  3. Ad Valorem? Speak plain English – If I told clients that fees were on an Ad Valorem basis thay wouldnt know what the hell I was talking about!

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