The FCA does not prescribe exactly how advisers should be paid, merely that the cost of advice is clear and is properly disclosed to and agreed by the client.
Keith Richards, chief executive of the Personal Finance Society, says the most popular charging methods include hourly rates and percentage of investments.
Many have claimed the FCA does not condone percentage charging, but this is not the case. Percentage charges are entirely within the rules, though in a series of post-RDR reviews the regulator has made clear it expects clients charged on a percentage basis to be given at a minimum pounds and pence illustrations to show the actual cost in a range of scenarios.
In practice, Mr Richards says many firms will use a combination of options across their client bank and in some cases with individual clients.
He says: “Specific charging models are largely a commercial decision for firms and depend on local competition and what clients will bear.
“Fairness is driven by disclosure and transparency so that clients can make an appropriate value-based decision. The fact that ongoing charges may fluctuate or when charges will be incurred should be made clear.
“Importantly, all charges should be appropriate and proportionate to the work involved (both for initial and ongoing advice).”
According to Gill Davidson, group regulatory director of Tenet, the main different adviser charging options post-Retail Distribution Review are:
1) Hourly rate: where the fee is not fixed and the total cost will depend on the amount of time spent working for a client.
Ms Davidson says this method of payment is ideal for potentially complex work and more competitive fee structures are possible by charging different amounts for general administration and paraplanner services.
The disadvantages include uncertainty about the overall final cost, clients cutting short sessions because of that and the need for the necessary back office systems in place to track the time spent and credit control, Ms Davidson says.
2) Fixed amount: where the cost of service is agreed up front and cannot increase.
Fixed amounts are well suited for focused advice services and no time recording system is needed, she says.
On the downside, Ms Davidson warns unexpectedly complex work may mean an adviser loses money. In addition, she says drafting the fee agreement and the associated scoping of work is time-consuming and there is also a danger of misunderstandings and complaints about work not covered by the agreement.
3) Fee-calculated as a percentage of a client’s investment/s: this may or may not be fixed, depending upon whether the client has a fixed sum in mind when they invest.
A fee calculated as a percentage of the investment is straightforward, Ms Davidson points out as long as a working example using cash terms is provided. Fees generated for the provision of on-going services are also linked to how well an investment performs, she says.
However, Ms Davidson warns it may not be cost-effective for clients investing a small amount and income may fall in line with the underlying investments. Income will also reduce as clients withdraw their capital, she adds.
4) Retainer fee: usually a fixed amount to secure future services or work to be provided.
Retainer fees provide a reliable and regular income and are useful for clients with complex needs who contact you for information on a regular basis, Ms Davidson says.
She says: “They are almost certainly liable to VAT though and can incur a high cost for monitoring small payments.”
This VAT point is critical: a clumsy carve-out agreed by HMRC to prevent advice fees rising post-RDR has meant that where a product sale can be argued as the eventual end goal - even where it does not, in fact, eventuate - fees can remain exempt from VAT.
Service provision, such as the provision of pure advice, should of course attract VAT. Where retainer or other charging methods are used which clearly cannot be argued to relate to a product sale, the 20 per cent tax would therefore need to be applied.
Advisers may also choose to allow facilitation by the provider for any charging method so long as that is specified by the client as how they want to pay and it is taken from their premiums or funds.
No matter which charging option a firm offers, Linda Smith, senior technical adviser of the Association of Professional Financial Advisers (Apfa), says the charges and payment method must always be agreed by the client up front.
Ms Smith says: “Adviser charging is not based on transactions, therefore advisers are more likely to be paid for all of the work that they do. On the down side, some clients may not want to write a cheque to settle an invoice.”
