As more clients move into retirement and start to run down their assets, advisers have been encouraged to examine their fee structures and ensure an over-reliance on asset-based fees will not jeopardise their long-term business performance.
While asset fees are a perfectly legitimate way of businesses and salespeople to receive revenue, the Profession of Independent Financial Advisers president Daniel Brammall tells Professional Planner that “this is not the provision”.
“This is not the simple provision of a service,” he says.
“We are talking about what is supposed to be impartial advice, and you can’t restore impartiality by simply disclosing a conflict. It doesn’t work.”
To maintain impartiality, Brammal says, advisers must eliminate structural conflicts – such as incentives – and this is where fees become problematic.
Brammall adds that PIFA has been a long advocate for no conflicts of interest in the provision of advice.
“Advice is supposed to be impartial, otherwise it’s not really advice – it’s a sales pitch,” he says.
To maintain impartiality, according to Brammal, advisers must eliminate structural conflicts – such as incentives – and this is where fees become problematic.
“Proponents of the asset-based fee are tending to oversimplify the options and say, ‘Well, looking at these hourly rate fees, that doesn’t work for anybody’, or that that will warn… that conflicts of interest can’t be avoided in service provision,” Brammal says.
“Therefore, you’re damned if you do, you’re damned if you don’t. If you want a financial service, you’re going have to accept conflicts, end of story. Neither of which is true. It doesn’t actually survive a reasonable inspection of critical thinking.”
But Brammal says there are plenty of options for advisers to charge fees.
“You can charge a fixed fee for the provision of a service, you can charge a retainer,” Brammal says.
“Sure, you could charge an hourly rate, you can charge a retainer that stocks up if you have an account – the adviser’s account – from which time is debited if you wanted to go down a hybrid route.”
Changing the game
When Finextra Wealth financial adviser Heath Hebenton began his career 31 years ago, percentage-based fees were the standard.
“I would argue probably the majority of advice firms are still using a percentage-based fee methodology,” he says.
“[But] I transitioned to a fixed-fee arrangement several years ago now. There was always a bit of an issue [with a percentage-based fee methodology], because by having [one], effectively what you’re doing is – while there’s nothing potentially ethical or morally wrong with it – is if you’ve got a client with, say, half million dollars and I’m charging them 1.1 per cent of my fixed fee… our interests are aligned. If the portfolio goes up, then I’m rewarded, and if it goes down, then I’m penalised.”
He adds that there are still “a lot” of advisers he talks to who still charge a percentage-based fee.
“As long as it’s explained to the clients, there’s nothing intrinsically wrong with it from a compliance perspective,” Hebenton says.
“But for me, I’ve obviously got pretty strong views on it. When we present advice to clients now, we charge a fixed fee for our statements of advice. They’re not percentage-based, we don’t charge a percentage as an entry fee. We might charge an establishment fee or an implementation fee. Then there’s an ongoing advice cost associated. Clients know exactly where they stand.”
Wealth transfer alert
A significant portion of the $3.5 trillion wealth transfer occurring this decade is expected to be absorbed by the asset management system, according to a recent Fidelity International research report titled Rainbow’s End.
Many individuals planning to pass on their financial legacy anticipate that their beneficiaries will likely use the transferred wealth to pay off existing debts, maintain their desired lifestyle, or invest in education, mirroring the reasons behind the older generation’s desire to share their wealth.
These expectations have implications for how financial advisers structure their professional service charges.
“Those advisers still charging asset-based fees risk facing revenue drops even if they can successfully engage the next generation,” the report said.
“But this is avoidable because demand for advice is increasing. If they haven’t already, advisers should start the process of replacing asset-based fees with fixed, flat fees agreed with the client upfront.”
When clients retire, they become “a lot more price sensitive” and their loyalty to their adviser is diminished as a result, according to Brammall.
“I think that’s a pretty established trend,” he says.
“It’s certainly been my experience in my practice, talking to [the] advisers that I do. It’s probably not unreasonable to say that [the clients] are motivated to seek out substance at the risk of the relationship.”
