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Pete Matthew: Breaking away from percentage charging

Matthew-Pete-2012-700.jpgI recently took a client to dinner. He had referred another client to me and I wanted to say thanks. What was meant to be a pleasant social occasion turned into a two-and-a-half hour mentoring session, as the client grilled me on the future of financial planning and how I was preparing for it.

This client, Jim, is unusual in that I have advised him without taking on any of his assets to manage. Yes, we do that. Not often, but as and when the situation demands. Turns out, financial planning need not be all about taking on assets under management. Who knew?

Jim was referred to me by another client, Tony, who is very different. Tony is a delegator and has handed his entire portfolio to me to look after. Jim, on the other hand, wants to keep control and save the money he would be paying me if I were managing his affairs.

Why clients need to know about adviser charging

Jim is well aware of the value an adviser can add but does not accept that ad valorem fees are the only way to pay for it. I am beginning to agree.

Instead, he proposed a regular retainer for me to keep him on my books and be on hand to answer questions as they came up. Furthermore, he suggested that, if we had a set of modular services, geared to different stages of life, he could pick and choose those as his circumstances dictate.

The example he used was a service for managing a drawdown strategy with a mind to minimising the lifetime allowance charge. Other modules could be family protection planning, estate planning, care fees planning and so on.

I have been thinking about this ever since, wondering if it is something we could implement and indeed whether it might be the future of how we get paid. I am not proposing we become order-takers, or that we should only offer focused advice at different times throughout our clients’ lives. Advice should always be given in the context of the client’s complete financial position, never in isolation.

Innes Miller: Is the percentage charging era finally over?

But I like the modular idea. You and I both know the value added by a good financial planner far outstrips the fees paid over time, but that value tends to come in fits and starts with clients’ changing life stages or legislative changes like pensions freedoms.

In between, there are long periods of sitting in a holding pattern. We are there if clients need us, and always honour our commitment to meet regularly but without very much to do. At these times, the AUM fees we charge on portfolios look expensive in return for the odd phone call and a quarterly email newsletter.

We all like to say we offer holistic financial planning but some clients just do not want to pay for a vague all-in service. Instead, they would rather be able to pick and choose from a menu of services as and when. I also have a feeling that, as well as charging structures coming under increasing scrutiny from the regulator, they will also come under market pressure as clients become more savvy and demanding. Once the last of the baby boomers retire, Generation X is going to be harder to convince about the merits of the all-in service.

So we can either ride the ad valorem wave until we retire or we can look to get ahead of the game before a change is forced upon us. Are any readers already working in this way? I would be interested to know how it is working for you.

Pete Matthew is managing director of Jacksons Wealth Management 



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There are 22 comments at the moment, we would love to hear your opinion too.

  1. It is sad that what you are suggesting is considered forward thinking, when most other professions (like my own) have been doing this forever. There is an inherent conflict of interest in ad valorem charging, and it remains the case that conflicts of interest are what give the industry a bad name (or at least they are the root cause). We often work with contingent fees linked to success, and equally are not averse to putting fees at risk for missing deadlines and objectives but the important thing is the client always knows how much they will pay and what they are paying for. You are right to make this move early – the FCA’s work around Fair Value across the industry suggests the industry will have to come up with a fairer way of charging – ad valorem charging (in its current guise) is the obvious villain

  2. I agree with the way you are thinking Pete! It is reflecting the client’s wishes, not shoe horning them into a certain proposition.
    Based on detailed research, not gut figures, for us as financial planners, the variation in cost for initial advice is around 4:1 based on what appears to be a “similar” initial enquiry – typically between 1% and 6% of their “investments”. A fixed 3% model means some are paying 3 times what it costs to deliver the advice, others only 50% – a huge cross subsidy.
    Likewise, ongoing charges – some clients spend a lot of time during the year contacting us, getting assistance. The FCA fail to recognise that fees however taken are the clients’ money to spend on our services as they, the client, see fit. They have blown their “budget” before we even think about having to reconfirm suitability each year.
    Our actual hourly rate (not published, but what the client pays) can be as low as £22/hour.
    There is no correlation between the cost of delivering advice and the amount being advised on – if you can identify that figure.
    So, we moved to hourly charging but the FCA are driving us away from this fair model because they assume there is a correlation between advice and size of investments, that the world revolves around product and that regulatory reporting is based on such – hence the idea that clients pay £150 per hour. One other thought, just agreeing with a client an ad hoc fee is time consuming – our timesheets demonstrate that it takes ages just to administer business, agree fees etc.
    Retainers are a great idea but is this investment advice, pension advice, non-regulated advice…. Costly to administer, report back through GABRIEL etc, we ditched them.
    MiFID II is disastrous and the fact is that FCA regulation (which is moving away from principle based regulation because they cannot pin the tail on the donkey when it goes wrong), and is now akin to working for a network! The FCA is strangling initiative, driving firms to % based fees without looking at the broader picture. And frankly they are not bothered and do not make any attempt to cost what we do, how it is done and where the costs are – and can be reduced. And they respect the FAMR – rubbish.

  3. What comes come’s first when a horse walks around the corner

    Its arse or its face ?

    Bit like this article (sorry Pete, far be it for me to ridicule your thought process)

    IMHO opinion its got very little with how I want to be paid…… its all about how the client whats to pay me, and how it suits them (not me) percentage, flat fee, retainers, combination of all three or two, we have the opportunity and resource to charge in a way that suits each and every individual client.

    I don’t really get the hang ups of some, who believe they do it best and their way is the way forward and anyone doing it different is doing so “not in the spirit of RDR”

    I say get on with the job and charge in a way the “CLIENT” is happy with talk to them get their view ! bit like you did Pete over a meal, he is happy you are happy job done.

    • Thought provoking article from Pete, but ultimately I think DH is right, it’s up to the client (within reason) the method of how we are paid (to so long as it covers our costs), but as Sam Caunt says, while we may have the will to charge in various manners, there are many circumstances (not less the FCA itself) which forces us to do things one way or another.

      • If you only give them a limited number of payment options then you’re not really allowing them to determine how to pay for your services.

        Its like the car that comes in any colour as long as its red.

  4. Thank you, Pete, for your thoughts on this. As you will be aware, I surrendered my FCA authorisation in July 2016 to concentrate on life and financial coaching. However, I would like to contribute my own experience of retainer charging to the discussion for other advisers to take away if they wish.

    In 2006 I took the decision to switch from ad valorem to retainers. Under the guidance of Brett Davidson I built a series of ‘service standards’ and priced them on a monthly retainer basis. This first attempt was based on three service standards, depending on a clients wealth and income and was modular to an extent in that wealthier clients had access to additional services that might be applicable to their circumstances.

    When I did the KPI course in 2013 I discovered the importance of productising my services and started to develop products for my specific market groups, namely young entrepreneurial and professional families, families approaching retirement, and widows. Each service was designed around the needs of the niche and costed accordingly, and this worked better.

    So, what did I learn:

    First, modular is difficult to provide because everything is interconnected. A long term care module, for instance, will need to include estate planning, investments, tax etc. It is, after all, holistic.

    Clients loved the change from ad valorem, even if the first attempts were a bit scrappy. They knew what they were getting and for how much. Many were happy to pay by standing order from their current accounts, others paid from their investment accounts. Developments since then in online shopping and merchant accounts such as Stripe can make this even easier.

    Working out the monthly retainer fee was fairly straightforward. From experience, I knew roughly how much time pa we spent on a client in each sector. This, therefore, was the minimum we had to charge (to cover our costs). We also looked at competitor charging. Most importantly, we made judgements on the value we were providing based on the service standards.

    In marketing terms, we had a huge advantage. We had a specific product at a specific price for a specific market, which meant we could have a structured sales conversation with potential clients at the end of their initial exploration meeting (which we charged for, by the way).

    In delivery terms, we were able to systematise the services based on the service standards – a huge advantage because the team knew what to do and we were consistent, which clients loved.

    I discussed the model with the FSA / FCA on a couple of occasions and they were very happy with the approach. I am out of touch with GABRIEL now, and things may have changed. However, I agreed with the regulator that, when it came to allocating income I could put much of it down to generic financial planning and coaching. We allocated income to pensions, investments etc based on the value of assets we had under management.

    Like you, Pete, I ended up with clients whose assets we did not manage, but part of our service was liaising with stockbrokers, accountants, solicitors etc and in fact we, rightly, became the client’s lead advisor to whom all others worked to, simply because we were the only ones who knew the client’s entire situation and objectives.

    In conclusion, Pete, I would certainly look at alternatives to ad valorem charging. However, start from a marketing perspective. Who do you want to work with? What do they want from you? Build a product. Price it for the value it provides. Systematise it. Deliver it.

    Hope this helps.

  5. DH Great comment.

    A lot depends on how much the client has in assets £100k or £1m. In my experience, if offered, most Clients would rather pay a ‘small’ ongoing ‘fee’ tax efficiently from their pension and be able to talk to me about financial ‘stuff’ whenever they want, rather than knowing that every time we speak or meet they are going to have to write out a cheque and so they therefore tend not to make the telephone call. I will though, raise it at my next Client Review Board meeting to check that this is still the case.

  6. Good article Pete. The issue is that all advisers should be thinking along the same lines. I don’the mean the specific approach you discuss but rather assessing their client banks, segmenting, and designing investment solutions (CIPs) and advisory services that work for their different segments. As of 3 Jan, advisers must do this as it is required by the new rulebook PROD (part of MIFID II).

    And everything Sam Caunt says about the FCA is wrong, as usual.

    • Ha, so, the regulatory tail wagging the dog

      Segmentation and solutions, sheep penning the poor consumer and their adviser into an ideal thought up by morons in a boardroom

      Says a lot for “ the consumer must be at the forefront of ones mind and a individual” or is it more of (what we suspect) “do as we say not as we do” …..

    • Rory, pre RDR most IFA’s segmented their client banks and continue to do so !!!!

      The FCA removed the choice of the client of how to pay for initial advice when they abolished commission, yet they (inc you) were warned at the time an advice gap would be created .

      If they remove client choice of how they want to pay for our ongoing services, the advice gap will get larger

      • Are you advocating commission as a reasonable, transparent and fair method of paying for your services?

        Via a contract between you and a provider, subsidised by ongoing inflated charges for third party services, for the life of the contract – or the penalties for leaving it – however long that may be.

        Goodness Greif.

        • Matt, not that I need to speak for Mike, but I would suggest that the point he is making is to do with the fact that a gap exists and it was created largely as a consequence of the removal of commission on contracts where regular savers did not have the capacity to pay for full advice upfront and had no desire to make factoring arrangements with an adviser, now you guys (we know!) can stand in denial of this issue as much as you like but it is a fact. We now work with those who can and will pay fees and the rest are left behind RDR left us no commercial alternative)… would those customers in the ‘gap’ choose commission over a factoring fee to access advice? Well the facts speak for themselves there!

    • Rory, you may not agree with all Mr Caunt says, and neither do I. But if that is what he perceives then the FCA is failing.
      In any event the FCA like the FSA before them will fail. Arguably it already has. Without any doubt bureaucracies always create chaos in the order that arises from liberty and markets, as they are relatively stupid, ignorant and behind the curve. What Hayek and Mises said was correct and continues to apply. Add to that the fact that FCA has no real democratic, legal or financial accountability and enjoys arbitrary power over the regulated without effective challenge or recourse (an absolute disgrace in a free society) and its apparatchiks no skin in the game and you are bound and certain that it will fail. Incentives matter you know.
      But back to the point. For some considerable time we have separated out our portfolio intermediation work from financial planning work. We then arrange for the latter to be paid in the most tax efficient way, so we try and keep it as ‘intermediation’. Which leads me onto VAT as probably the Worst Tax in the World.

    • Looking forward to Sam Caunt’s response. Should be illuminating.

  7. Several of the comments seem to miss the point that ad valorem fees aren’t a mechanism for paying fees; they’re a mechanism for setting them. A mechanism that’s disconnected from the work involved and from the value added. A bit like estate agents.

  8. Christopher Petrie 25th October 2017 at 6:36 pm

    I wonder if I read Lawyers Weekly (or whatever trade mag they have) would there be regular articles from practitioners explaining how their firm charges its clients? And those articles also pushing their fellow practitioners to change their charging models to those of the writer?

    I expect not. Nor In Accountancy Age. Nor any other professional trade magazine. So why do I have all these similar articles in my trade press on a constant basis?

    Surely, the way we charge our clients will depend on their agreement. If they don’t like our fees, or their structure, they will simply stop paying for our services.

    In the meantime, please….stick to your own business and give it a rest from lecturing the rest who have different businesses.

  9. Presumably the retainer covers ongoing administration of any investments and annual reviews.

  10. Thank you all for your comments – very helpful.

    This is definitely very much at the thinking-through stage right now; far from a completed process!

    I absolutely agree that it should be the client that is the starting point. I don’t believe ad -valorem fees are wrong at all, certainly it works for the vast majority of our clients, but I see change coming and want to be ahead of the game.

    I don’t think ad valorem will disappear entirely, at least not any time soon, but may need to be offered as an option, with the retainer/modular package offered alongside.

    Jeremy’s comment about it being difficult to separate and package up bits of a service when the bits very often overlap, is absolutely right. I can imagine a bunch of modular services which, if more than one is needed at any given time, are discounted if more than one is needed.

    I foresee a lot of trial and error in my future!

    Thanks again, chaps

  11. Lexus offer cars with high spec options automatically included, some of which you may never need or use but they are available to you if/when you need them. The benefit is that it gives you the comfort of knowing that you have everything that you will probably ever need for a specified price.

    Mercedes offer some basic specs and an options list longer than your arm. Initially they may seem cheaper (or “fairer/more explicit”), but often they end up more expensive than a comparable specification Lexus. The benefit is that it leaves you knowing that you have exactly what you wanted, despite the fact that it may have a lower spec than a Lexus and ends up costing you more.

    Some people prefer Lexus. Some prefer Mercedes. I say offer both. Be fair. Be clear. Be profitable.

    P.S. Some people don’t know which they prefer and just buy based on brand.

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