His comments on ‘three plus a half’ being doomed as a fee-charging model have been particularly difficult for advisers to accept. He argues that there are clear cross-subsidies with contingent fee models using this formula since clients who do not proceed with executing a plan will be subsidised by those who do.
He adds that this fee model also means that smaller investors receive a better deal than larger investors, which will inhibit advisers from migrating to the higher end of the market. The logic is difficult to argue against but there are more fundamental reasons why advisers should be looking at alternative fee structures.
If, as we are told, only 13 per cent of investors are willing to pay ongoing fees but 40 per cent are willing to pay task fees (source: Winning Propositions: The Consumer Market Post-RDR published by JP Morgan), then there is a market for advice that is largely untapped. Task fees and hourly fees are not being commonly used yet by advisers and represent a means of expanding into different advice markets.
It is worth looking back to the reasons why ‘three plus a half’ came about as such a popular model. Twenty years ago almost all advice was paid for by initial commission from product providers. While this provided higher initial remuneration (5 per cent to 6 per cent was not uncommon and higher rates than this were negotiated on some products) it did nothing to add to the embedded value of the adviser business.
Increasingly advisers became concerned with their exit strategies and the move to ongoing trail commission was a big part of establishing the exit value of their business. In turn this drove adviser business models towards acquiring and retaining more capital-rich clients. With this change came a greater focus on the service part of the proposition as advisers sought to demonstrate value to their clients post engagement to cement client retention.
With the changes brought about by RDR advisers have sought to adopt fee-charging models which are mirrors of the old commission model. It is not the first time we have seen a reaction to regulatory change that followed the line of least resistance. This time, however, such an approach may not provide a long-lasting solution. Trail fees paid by providers are under threat from a variety of angles including regulatory and provider pressure. Fund switches between investment wrappers will halt the trail payment and require any new fee to be agreed under the adviser charging rules. Rebates from platforms are to cease and Sipps are under the spotlight. Aegon hit the news after it appeared to have cancelled trail payments in response to a lack of activity for three years on a client’s account. Future dependency by advisers on trail fees to bolster the value of their businesses may be misplaced. The multiples being applied to value adviser businesses will need to take account of these threats.
With an uncertain future for trail fees it may be time to revisit the business model at a fundamental level. The ‘three plus a half’ model has driven adviser behaviours towards offering a ‘review/plan/advise/implementation’ service followed by post-engagement reviews.