How to construct different charging structures

“Most clients we have dealt with don’t like hourly rates, which leaves either fixed fees or percentage of assets. Both have good and bad points but it depends on the actual client profile and service offering which is best.

“There is no reason why a fee proposition can’t be fixed fees for some clients and asset fees for others, or a combination of both for a single client.”

Phil Billingham, director at Phil Billingham Partnership, says that as long as advisers charge in a clear and transparent manner that the clients feels represents value for money for them, then there is flexibility for all methods.

He believes charging percentage fees is a transition arrangement and that as the RDR dust settles ever more financial advisers will migrate to a flat annual fee, as has already proved very popular for planners.

The amount you charge “depends on the client and the work required and the value added,” he says.

“I will state that most advisers undercharge and under-value their work, and fall into the trap of only valuing transactions or picking funds, which is then what clients value. That way does not work, and is a serious business mistake, at least in my opinion.”

The way to devise an hourly charge, says Fiona Tait, business development manager at Scottish Life, is to calculate how much you need to earn in a year to cover your costs and make your desired level of profit, then break it down.

“Make a judgement on how long it takes to deliver each process on your menu for a typical client. Calculate a set fee for that service, then identify scenarios where you might need to build in ad hoc/additional fees and/or where you could offer a discount.”

Mr Dick recalls that when his firm experimented with different fee structures over a decade ago, before settling on a combination of fixed fees and asset-based fees, it took some understanding from clients.

“We didn’t have a clear enough service proposition to justify the fees and, pre-CFP qualification, we were inexperienced at delivering financial planning so the hourly bills ended up being quite high.

“I think we put the cart before the horse. I would start by defining the ideal client and service offering first, then worry about fee structures.”

Ms Tait thinks that clients tend to prefer fixed fees as it gives them more certainty and she believes this approach will become more standard over time, particularly for one-off tasks, while a percentage approach is more suitable for ongoing services where clients with larger assets receive a higher level of service than those who have less invested.