Advisers have ditched ‘three plus a half’ model post-RDR

Advisers are increasingly moving away from the traditional ‘three plus a half’ charging model in the post-2012 world but most are continuing to charge fees on a contingent, percentage of investment-based initial and ongoing charge basis, according to a new study.

Action Consulting conducted a detailed survey of adviser firm charging and found that among the 79 firms that gave a full breakdown of their fees, initial charges have fallen and ongoing costs have risen on average post-Retail Distribution Review.

The apple has not fallen too far from the tree: the average initial fee charged for a £100,000 portfolio is now 2.4 per cent, while the average ongoing fee for a £100,000 portfolio is 0.82 per cent.

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Of the 30 per cent of respondent firms that charge for initial fees as a fixed percentage, not one charges more than 3 per cent. A sizable majority of firms, 70 per cent, use a tiered percentage that drops as portfolios increase in size; more than 60 per cent of firms are charging 3 per cent for portfolios of £50,000, while only 10 per cent are doing so for portfolios of £250,000.

For ongoing service charges this trend is reversed with a majority, 53 per cent, applying a flat percentage of assets, with only 38 per cent mainly using a tiered percentage. Of those firms charging a level percentage less than half charge 0.5 per cent or less, while around a quarter charge more than 0.75 per cent.

Of those charging on a tiered basis, as many as 46 per cent of firms charge more than 0.75 per cent on portfolios of £100k. For funds of £250,000 nearly two-thirds of firms charge more than 0.5 per cent.

Many advisers had expressed concern in the lead up to the new rules coming into force that following the move to explicit charges many clients might balk at high initial fees, which could explain the desire from some firms to drop their upfront charge

The higher ongoing fees could be a reflection of the heightened requirements under RDR for advisers to justify recurring charges.

Adviser charges have recently fallen under the regulator’s spotlight. In its recent RDR implementation review, the FCA expressed concerns that some advisory companies have not correctly disclosed post-RDR charging structures to their clients, adding that some charging structures remained confusing.

Furthermore, the regulator’s June board minutes, published last week, also revealed concern at the “contingent” charging models that many advisers continue to operate, which are based on sales of products and could therefore encourage ‘churning’.

The research suggests that most firms continue to operate a contingent charging model that is based predominantly on percentage investment rather than explicit fees.