It’s often said that clients of financial advisers should be allowed to choose for themselves how they pay for advice. The client-choice argument is often advanced in support of asset-based fees. In the current environment, where asset values have plunged, client portfolios have shrunk in value and advisers’ incomes have declined, it’s an issue worth revisiting.

It’s true that advisers whose principle source of revenue is a fee calculated on the value of client funds invested have “skin in the game” and share their client’s interests in generating positive investment returns. It’s also true that asset-based fees are easy to calculate and to collect.

Even so, to say the primary attraction of an asset-based fee is that the adviser shares the client’s interest in generating positive investment returns suggests that advisers who charge in other ways don’t have the same interest. It also suggests these advisers who don’t charge asset-based fees don’t face a risk to revenue if they provide poor investment advice; that argument has been weakened by the fact that it’s never been easier for clients to opt out of receiving advice services if they’re not satisfied.

Asset-based fees place the viability of an adviser’s business at the whim of the markets, and it’s debatable whether exposure to a market event that could wipe out an adviser’s business is actually in the long-term interests of that adviser’s clients. Calculating the price of advice according to the value of a client’s portfolio ignores the intrinsic value of advice itself.

And the financial advice industry desperately needs advice itself to be regarded as valuable if the industry is ever to be regarded as a profession.

What consumers say they want

But in any case, CoreData’s research suggests that if you do let consumers choose how they pay for advice, not many of them will choose an asset-based fee. Earlier this year we asked financial advice clients how they currently pay for the advice they get, if they know (Chart 1 – below); and how they would prefer to pay for advice, if they have a preference (Chart 2 – below).

Around three in 10 (27.3 per cent) clients who have an ongoing relationship with an adviser

currently pay a fee based on a percentage of the funds they have invested. Yet fewer than one in 10 (9.6 per cent) of those same clients say that’s how they would prefer to pay.

By far the preferred method of paying for advice is a fee, quoted upfront, that depends on the scope of the advice they need – almost a third (32.7 per cent) of people who already have an adviser say they would prefer to pay this way.

As many clients (10.0 per cent) would prefer to pay an hourly fee for advice as would prefer to pay a percentage of the money they invest. It should also be noted at around one in eight (12.6 per cent) of clients with an ongoing advice relationship do not know how they currently pay for the advice they receive; and a similar proportion (13.4

per cent) of them don’t know how they’d prefer to pay for advice.