Experts are warning the FCA could intervene on adviser charging structures, as research reveals up to 90 per cent of firms are operating a percentage-based fee model.
Following another warning by FCA chief executive Martin Wheatley on contingent charging models, Money Marketing reveals how firms are really charging and how fee models are set to become a key battleground this year.
Research by Europe Economics published as part of the FCA’s post-RDR thematic review last month found the majority of advisers have a charging structure based on a percentage of funds invested, according to an analysis of 2013 retail mediation activities return data.
It found that for initial charges, between 86 per cent and 91 per cent of firms (depending on size) typically operate a charging structure based on a percentage of assets invested.
It also shows between 27 per cent and 55 per cent of firms typically offer an hourly charging structure, and between 39 and 67 per cent typically offer a fixed fee model.
The overlap reflects the fact many businesses use a variety of charging options.
While the data does not record the proportion of fee models which are contingent on a sale taking place, Europe Economics says a “large proportion” of charges work in this way.
It cites consumer research carried out in September by NMG Consulting, which found that of those who had considered an investment product but did not go on to purchase one, 72 per cent said they did not pay a fee.
EY senior adviser Malcolm Kerr says: “There is an obvious conflict of interest where the client only pays if they purchase a product.
“It is completely clear that a lot of advisers are not comfortable in selling pure advice for a pure fee and feel more comfortable wrapping it all up in a product.”
Kerr believes there will be a gradual “evolution” towards fixed fees.
But research from financial services research firm Investment Trends suggests few advisers plan to reduce their reliance on asset-based charging structures in the next few years.
Its Investment Trends Adviser Technology Report, based on a survey of 1,120 advisers, found the average advice firm derived 52 per cent of its revenue from asset-based advice fees in 2014, and 21 per cent of revenue from fixed or hourly advice charges.
By 2017, the average adviser expects the percentage of revenue from fixed or hourly charges to increase to 25 per cent.
But they also expect revenue from asset-based charges to rise to 56 per cent.
The Consulting Consortium head of policy Rebecca Prestage says charging structures “took a back seat” for many advisers in the run up to the RDR.
She says: “We all know firms need to work out how much it costs them to run their service to calculate their fees, but some have just picked out random numbers.
“I think the FCA will start looking at this from a consumer point of view, and ask advisers to justify how their ongoing fees reflect the services they provide.
“The regulator is also concerned about cross subsidies. If a firm is doing initial interviews for free, then customers who take out a product are paying for that initial session for others. If you look at lawyers and accountants, you might get the first 15 minutes of the meeting free but if you spend a few hours with them you have to pay for it.”
TenetConnect and TenetSelect managing director Mike O’Brien adds: “While the FCA is not a price regulator, it does expect that fees for investment advice should be reasonable. It can and will act if it thinks fees are excessive.”
RGP Compliance managing director Simon Collins says he has challenged the firms he works with to justify their percentage-based ongoing charges.
“We have asked firms charging 1 per cent how much work have you actually done on this and can you back it up with time sheets?,” he says. “That is what a customer wants to see, and if the FCA looked at this I would expect them to do the same.”
While the regulator has dismissed the prospect of an outright ban on percentage charging, Wheatley has been warning on “dealing bias” since 2013, and reiterated those concerns in an exclusive interview with Money Marketing last week.
He said: “We want it to be clear what people are paying for, and that is the bit that is still unclear. Contingent charging is something we have raised questions about, and we have some questions about whether that is delivering what we think the answer is, that is, separating out the advisory part from the acquisition and purchase of the product.”
Independent regulatory consultant Richard Hobbs says: “The RDR has effectively allowed commission to continue and Wheatley is understandably fretting about that.
“There are two purposes to his public hand wringing: to set the mood music for his political overseers, and a forlorn hope that he will terrorise the market into developing remuneration structures he is more comfortable with.
“That is not going to happen because too many advisers feel their clients will not pay for advice upfront.”
Money Marketing contacted a number of major advice networks and national firms for details on their charging structures.
Chase de Vere, Towry, Tenet, Bellpenny and Personal Touch all said they provide the initial client meeting free of charge.
But with the exception of Tenet, these firms all said they would charge for a personal recommendation separately to a charge for any subsequent transaction. Tenet says its advisers do not always charge for recommendations separately.
Bellpenny, Chase de Vere and Tenet say the majority of their clients are charged on a percentage basis, while Towry charges clients on an hourly basis for financial advice and on a percentage basis for investment management.
Personal Touch advisers charge on an hourly basis. Marketing director David Carrington says the network provides a fee structure for its members to work within, which caps hourly charges at £300.
Customers are classified as standard, complex or hugely complex, and there are caps on the number of hours a piece of work can take for each category. Personal Touch also “sense checks” what hourly fees equate to as a percentage of funds invested.
“We knew this was a different approach to some of the more traditional product selling firms when we devised it,” says Carrington.
“Our advisers have no problems using hourly fees and I am pleased that we do things differently to the rest of the market.”
Sesame, Openwork, Positive Solutions and St James’s Place declined to give details of their fee models.
CWC Research managing director Clive Waller says most advisers find it difficult to charge on an hourly basis.
“To truly work on an hourly basis you have to not answer the phone when it rings, and advisers don’t work like that,” he says. “Advisers struggle to record time accurately.”
But Informed Choice executive director Nick Bamford says experienced advisers should be able to produce accurate time estimates.
He says: “We charge fixed fees based on a calculation of how long certain pieces of work take. Advisers should know this, and while the unexpected can happen I do not think that is a strong enough argument against hourly rates.”
So where could the market move to this year and beyond? Some have suggested that the Government’s pensions overhaul in April could prompt a greater shift to flat fees.
Collins says: “Post-April, a lot of people are going to need advice but they are not necessarily going to need a product, so it will be crucial that charging structures are clear.”
O’Brien adds: “As a consequence of the reforms, we expect more firms will charge an explicit and potentially flat fee for the initial personal recommendation, and a separate fee if they are asked to execute a transaction.”
Meanwhile some advisers are starting to produce an annual statement at the end of each year detailing to clients in pounds and pence all charges they have incurred, including platform and fund management charges.
Bamford says: “We do this for clients where they want it. It allows them to make a judgment about the value of our service, and see exactly how much they are paying.”
Others suggest the market will move to a model for ongoing fees which is based on a lower percentage “retainer”, and an additional fixed fee for any specific work carried out.
“I can see a situation where the client pays the adviser some kind of percentage fee just for being there, but when they need something done they pay an hourly or fixed fee,” says Kerr.
Chris Williams, chief executive of simplified advice business WealthHorizon, believes the core ongoing service proposition will be money management, with advice charged for as and when customers need it.
He says: “Some advice structures are a bit like a packaged bank account – you get charged 1 per cent for all these extra services you probably don’t need every year.”
Collins argues: “Where percentage charging could come under some tough scrutiny is ongoing services, as some firms are charging for a whole range of services which customers may not use. This is a value for money issue for the regulator: it has already looked at insurance add-ons and packaged bank accounts and this could be the next step.”
Philip Milton, managing director, Philip J Milton & Company
I am concerned that some of the old commission models have been carried over into the RDR. But there are some reasons why it is appropriate to charge higher value clients more; for instance, they carry greater liability risk in terms of potential complaints.
Dennis Hall, managing director, Yellowtail Financial Planning
When you put an hourly rate in front of a customer it knocks their socks off, because they do not see advisers as in the same league as lawyers. A fixed fee might work for a pensions review but for full financial planning it is much harder to know how much work will be involved at the outset.
Who charges what?
Hourly fee: £175
Percentage fees: 1-3 per cent initial charge, plus 0.5-1 per cent ongoing charge
Typical structure: Majority of clients choose a solely percentage-based fee, but a significant minority choose hourly charging
Are charges contingent? Initial meeting is free. A recommendation report is charged for separately to any transaction.
Chase de Vere
Hourly fee: £250 for advisers, £80 for administrators
Percentage fees: Up to 3 per cent initial charge, plus 1 per cent ongoing charge
Typical structure: Most clients are on a percentage fee
Are charges contingent?: Initial meeting is free. A recommendation report is charged for separately to any transaction.
Hourly fee: £100-300
Percentage fees: Not used, but Personal Touch does ‘sense check’ fees on a percentage basis
Typical structure: Hourly fees
Are charges contingent?: Initial meeting is typically free. A recommendation report is charged for separately to any transaction.
Hourly fee: £150
Percentage fee: Typically 3 per cent initial charge, plus 0.5 per cent ongoing. Charges must not exceed 4 per cent initial and 1 per cent ongoing.
Typical structure: An estimated 80-90 per cent of members charge on a percentage of fund basis and facilitate charges through providers.
Are charges contingent?: Initial meeting is typically free. A personal recommendation may be charged for separately to any resulting transaction, but not always.
Hourly fee: £200-300 for advisers, £85 for administrators
Percentage fee: For investment management services, initial fees are 1.5 per cent for portfolios up to £250,000, and 1 per cent for portfolios over £250,000. Ongoing fees are 2 per cent for the first £200,000, 1.15 per cent for the next £300,000, 0.9 per cent for the next £500,000 and 0.75 per cent thereafter.
Typical charging structure: Hourly fees for financial advice, percentage fees for investment management services
Are charges contingent?: Initial meeting is free. A recommendation report is charged for separately at £1,500.