Dramatic market dips resulting from the global pandemic have seen some advice firms’ revenue streams take massive hits, putting pressure on the assets under management (AUM) model. And, like in any time of crisis, advisers are questioning whether their approach is best and some are exploring different possibilities. Claire Tyrrell spoke to several advisers about their charging structures and their view on fixed fees versus percentage-based models.

Capital Asset Management IFA and chief executive Alan Smith has operated his Chartered firm on a fixed fee basis for the past five and a half years after changing from a percentage of AUM model.

Smith recently spoken to some advisers who were looking to make the same shift in light of current market conditions: “I think [change] was happening anyway. On one hand firms’ revenue is really under pressure right now, and secondly they’re stuck at home – I’m hoping people will have more time on their hands to reflect on their current business model.”

He points to the fact that many advisers work harder in an environment where markets are down, so it would make sense to align that work with a greater income stream.

“Most businesses would like some predictability about their income and say ‘if we do x, we’d get paid y’, whereas this situation is the opposite. Investment markets are very difficult and valuations are going down, most advisers are working twice as hard trying to keep in contact with their clients,” he explained.

He said by charging clients based on a percentage of their investments, advisers were cutting out a portion of the market.

“If you charge a percentage of assets there’s huge parts of the population you’re eliminating from being able to give advice. Plenty of younger people quite like the idea of having sensible financial advice paid on a monthly basis, the other area is business owners and entrepreneurs.”

Engage Financial Planning managing director and Chartered financial planner Sam Sloma started his own firm in 2017, partly in a bid break away from the traditional AUM charging structure.

The London-based IFA charges a tiered-based fixed fee, depending on his clients’ needs, and works with a lot of footballers, entrepreneurs and business owners.

“We don’t preach to everyone that fixed fee is the only way – I don’t necessarily believe that. I think everyone can choose the way of charging they’re happy with,” he says.

“I’d much rather give up the upside of AUM knowing my revenue can’t drop 30% in three weeks because that would obviously cause me stress and issues. Knowing my revenue hasn’t taken a dip is very comforting – you give up four years out of five to not have that one bad year, and from my own personal perspective I’m okay with that. I don’t want my revenue to be impacted by something I don’t control.”

Sloma adds that his firm do a lot of things that most do not typically do, like advise on mortgages, car finance and solicitors. In his words, fee structures are a matter of “horses for courses”.

‘Too early to act’

For his part, the lang cat consulting director Mike Barrett says he can see the attraction for advisers to shift from a percentage to fixed fee model for their clients, but does not believe now is the time to make that change.

According to the consultancy group’s latest State of the Adviser Nation report, the majority (69%) of advisers charge a straightforward percentage-based ongoing fee and 7% charge an ongoing fixed fee.

With those stats in mind, Barret says the “knee jerk reaction” in global markets in March will have dented advisers’ incomes, but they should see better returns in April.

“The reality is most of the adviser fees are being paid on a revenue basis, so April will be a lot better than March, and hopefully averages out over the year. I can see the attraction from the advisers’ point of view of wanting to have a more stable level of income and things that aren’t dependent on things beyond their control,” he said.

“I don’t think this is a time to sit down with a client and say we’re going to change the ways your fees are structured. It’s about reassurance, sticking with the plan.”

Blended approaches

Cambridge’s VA Associates IFA Victor Sacks changed his initial fee from percentage-based to fixed two years ago after coming to the conclusion the former model was unfair.

After an initial fixed fee, Sacks then charges on an ongoing percentage basis.

“I now charge anywhere between £1,750 and £3,400, depending on whether I’m looking at money out of a bank account into a new investment, whether I’m looking at pension switches, EIS, VCT or complex stuff that needs a lot of time and work. Then I charge anywhere between 0.5% and 1%, depending on how often and frequent we need to do things,” he explains.

While certain advisers “preach anyone who charges percentage is a charlatan”, Sacks says, when you drilled down to most fixed-fee only models, many were in the five figure range.

But, he adds, there are more important things for advisers to be focusing on before they criticise one another for how they charge clients. “Whether it’s fixed fee or not people don’t mind. We’ve got so much more in our profession we need to sort out before we point the finger at one another… I think that’s the one piece of work pressure needs to be off advisers.”

Wingate Financial Planning Chartered financial planner Alistair Cunningham charges his clients on a tiered basis, depending on their level of assets: “We have a minimum fee and a maximum fee and we have tiering on it, so It’s not fixed per se, but it’s not like straight asset based charging.”

Essentially, clients are charged more when they have more assets under advice, but the fee as a proportion of their assets decreases the more assets they have.

For a client with £0.5m to invest for example, Wingate would charge £3750. For a client with £1m, on the other hand, the fee would be closer to £6000, thus a larger amount in pounds and pence but a smaller percentage fee.

Cunningham argues many advisers claim to be purely fixed fee, but their charging structures usually operated on a tiered basis.

“Most of the fees I’ve seen from people who claim to be fixed fee are quite similar to what we do. Funnily enough more clients with more assets pay more in fees because they are going to a fixed fee service – it’s got more fees attached to it, which doesn’t really seem to be the sprit [of the model].

“The majority of the ones I’ve seen are just some permeations of value-based charges, rather than being bone fide fixed fee for one service.”

In addition, Cunningham does not believe the AUM model was under threat as a result of the recent market downturn.

“It is longstanding and will continue to be longstanding. It’s not perfect but it works for some firms and some clients. There’s no perfect model. I’m of the mindset that no option is perfect – we’ve got it kind of right but there are times when our model doesn’t hold up.”

This article was previously on Professionaladviser.com

Further reading

How will Covid-19 change the way in which people ask for financial advice?