Letter: Monthly IFA service plans make sense
I am stunned by all of the talk of 3 per cent upfront charges and 0.5 per cent for ongoing maintenance. Surely this is counterintuitive to modern business culture and creates a significant barrier of entry for clients?
Consumers and advisers are now used to paying monthly or annual service charges for just about everything. Mobile phones, as a good example, are completely subsidised by monthly service plans. Even the newest and best devices available are free with the right monthly service plan.
My argument then is that this model should not be different for financial services. Large upfront fees create a huge barrier to entry for clients. Remember it is not 3 per cent in the new adviser charging statements, it is £300 for every £10,000 under management.
For a client with £50,000 in investable assets, an adviser is going to have a hard sell trying to convince a client that their first-year service is worth £1500. And this barrier to entry for the consumer is only going to get worse the higher up the wealth chain you go at 3 per cent.
While I am a strong advocate for value of advice, I believe advisers are going to have a difficult time convincing clients of the value of even the most amazing service, if it costs £300 for every £10,000 under management upfront.
And why is it only 0.5 per cent per cent for ongoing advice? Surely this just diminishes the value of the ongoing relationship? What is it the adviser does in year one that is so expensive that is not done in year two? Is the ongoing proposition so disappointing that the client should not even bother with it if it only costs 0.5 per cent? What about the client that is contributing on an annual basis?
Is 3 per cent for year one and 0.5 per cent based on the relationship or 3 per cent for each new investment and then 0.5 per cent? The first method is a larger enough barrier to entry. The second method would be a recurring barrier to entry problem, because both the adviser and client end up with a complex charging structure that is difficult for either to understand.
The other fault with this charging model is that advisers are going to be hard pressed every year to build their practices and get the 3 per cent from the new clients or investment. In this model, advisers are going to be caught in 'peak and valley' sales cycles, hoping to bring in new clients and consequently ignoring current ones for the sake of hunting out new prospects.
I believe advisers should steal the model proven from other industries by reducing the barrier to entry for consumers and thereby creating recurring revenue streams for themselves. The numbers below should help illustrate my point:
For a client with £100,000 in investable assets, not only is the 3 per cent / 0.5 per cent model a much tougher sell to the client, because of the initial £3000 charge, but importantly it actually underperforms the 1 per cent recurring charge model. The amount in charges received by the adviser on a 1 per cent recurring basis on investable assets of £100,000 with annual growth of 5 per cent over a five-year period, amount to £5,410, compared to £5177 on a 3 per cent initial charge and 0.5 per cent recurring basis on the same portfolio.