Adviser fees should reflect work done and risk taken
Charging by percentage of assets under management is fair. If you pay for cheap advisers you get cheap advice, says Stephen Harper, CEO Attivo Group
In the debate over whether financial adviser firms should charge flat fees for work done or a percentage of assets under management, Stephen Harper, CEO Attivo Group is firmly in the latter camp. He argues that this reflects the work and risk the adviser firm is taking in dealing with the individual client.
“I think charging a percentage of assets under management is a fair way of charging because the bigger the funds the bigger the portfolio and the more risk you are taking as a business.
“The argument that it takes the same amount of work to service a person investing £100,000 as it does someone invested £1million doesn’t hold up,” Harper says. “As a business you have much more liability with a larger sum of money, so there is a cost to that liability.”
Nor does Harper believe that clients with larger sums of money with the company should receive a discount on the percentage charged. “Handling £1million as against £100,000 is 10 times the risk. This shouldn’t equate to 10x the fee but there should be a multiplier. There isn’t a simple equation for that; it will be down to the individual firm. Attivo Financial Planning charges 0.65% of assets per annum for ongoing service and advice across the board and Attivo Asset Management, our discretionary fund management arm, charges between 0.5% and 0.85% for management of portfolios.”
Harper points out that professional indemnity (PI) insurers’ premiums reflect the fees charged by the firm against risk, rather than the assets invested. “If you charge low fees for large money, your exposure to risk is raised.”
Harper says it could be argued there is a minimum cost to running a financial planning business and to running a portfolio, against which a fee structure could be calculated. “The concern that people have is that the larger portfolios are subsidising the smaller portfolios and whether that is reasonable or fair. But if a fee-per-portfolio as opposed to fee-per-size of portfolio came in, hypothetically, I think there would be a significant pressure on the lower value portfolios,” he says.
Financial planning is expensive business
In a highly regulated market, with defined capital adequacy costs for a business plus increasing FCA and FSCS levies, in addition to the day-to-day operational costs, trying to run a financial planning business on a flat-fee basis Harper suggests, would put huge pressure on businesses and could see firms go out of business or the quality of advice deteriorate. “No-one should under estimate the cost of running a financial planning business properly nor the cost to the business of setting up a financial planning strategy for a client. The cost of just reviewing clients’ existing products and policies, doing the due diligence and researching the whole of market is substantial,” he says.
“If you pay for cheap advisers you get cheap advice – and that’s dangerous. If you’re selling your financial planning cheap, how good are you going to be because what kind of business are you going to be able to afford sitting behind you providing the support?
“Proper financial planning cannot be done with junior staff. You need chartered paraplanners and they aren’t cheap – and quite rightly so, they should be paid as professionally qualified and capable people.
“If you think what goes into producing a suitability letter to document the full financial planning advice for a client: The person doing it has to be articulate, numerate, able to analyse products, know the industry and be qualified and competent. Ultimately, you are looking at the majority of your staff being chartered. That will be the norm for a high calibre financial planning firm.”
The litmus test for charges by percentage of assets under management is market forces, Harper suggests. “Clients can vote with their feet if they don’t agree with the charges. We would say to any client that we do add the value that we’re charging for. But if the client feels we’re not, or if the client can get what we do cheaper and /or better elsewhere, then we’d expect that the client would leave. But our client retention is very high.”
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