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Advisers split on fee models

With commissions soon to be phased out, the industry is divided on the optimal fee-for-service remuneration model, with a majority indicating preference for hybrids.

An ifa straw poll conducted over the past three weeks has found no one remuneration model has emerged as a clear front runner, with a range of views on which fee model is considered “best practice”.

Of the 285 respondents, 73 (25.6 per cent) indicated preference for a “flat fee monthly/annual retainer”, followed by the “hourly rate” (10.5 per cent), “asset-based fee” (10.2 per cent) and “flat transactional-based fee” (8.4 per cent).

Almost half of the respondents (45.3 per cent) voted for a “hybrid of any of the above”.

Elixir Consulting managing director Sue Viskovic, an expert on financial planning business models and author of Pricing Advice, said partly the results reflect that the term “best practice” is problematic.

“There is no one-size-fits-all approach to remuneration; every business will need to work out the variables of their client base and what it costs to run their practice,” she told ifa.

Whether or not a hybrid model is right for a financial advice practice will depend on what that hybrid involves and the definition of ‘hybrid’, Viskovic said.

Elixir’s research shows that a hybrid model, whereby clients are charged by a flat upfront engagement fee followed by an ongoing asset-based fee, is the “most popular at the moment” with many practices finding this model easy to administer.

However, Viskovic said this particular hybrid model can “restrict the type of advice [advisers] can offer, especially restricting them from servicing clients that they can’t manage money for”.

Kate Humphries of Licensee Pathway Services told ifa last month that while hybrids can be right for some businesses, they can be “structurally complicated and therefore more difficult to communicate to a client”.

Of the stand-alone remuneration models, Viskovic said she is encouraged by the strong votes in favour of a “flat monthly/annual retainer”, which is the model that is likely to be right for the “broadest range of advice businesses”.

“These figures suggest a steady increase over the years, which is good to see,” she said. “When the industry first started moving away from commissions I think it saw asset-based fees as just the easiest model, so it was very popular. But there is now definitely a swing away from asset-based fees.”

She said the move away from asset-based fees may have been aided by the stance of the regulator and APES board in recommending practitioners to adopt alternative models.

At the same time, Viskovic expressed concern at the 10.4 per cent of respondents who voted for the “hourly rate”, saying it is a potentially “dangerous” model for long-term profitability.

“While it’s true that many lawyers and accountants use this model, evidence suggests many are moving away from it,” she said. “While clients understand it because it’s been around for so long, they don’t like it.”

For deeper analysis of the fee-for-service remuneration model debate see the upcoming cover feature in ifa magazine.

Have your say in the latest ifa straw poll here: