Are percentage-based fees best for clients?

Donia O’Loughlin

In a New Year week during which we were not exactly inundated with news, it is perhaps unsurprising that the story which has garnered the most attention is a blog post by Money Management’s ‘secret IFA’ exposing what they term as the “great RDR fee hyposcrisy”.

In actual fact, there were a few strong stories this week. The blog’s popularity with readers lies rather in the fact that now we have all had a year to get used to the removal of commission, how to charge clients to keep advice attractive and economically viable is emerging as one of the major post-RDR debates.

The ‘secret IFA’ - and believe me it is a ‘secret’, only MM editor Jon Cudby knows who it is - was railing against growing rhetoric in the industry and an apparent imperative on the part of the regulator pushing fixed costs over and above percentage fees as the most ethical way to charge clients.

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Last year, in its Retail Distribution Review implementation review, the Financial Conduct Authority criticised percentage charging and warned advisers must state fees in monetary terms. It stopped short of saying fees could not be charged as a percentage, but some in the industry believe that is the way the wind is blowing.

Our IFA said he has trialled fixed-rate fees and hourly fees but in his experience none of them work quite as well as a percentage of assets under management. Further, he said most of his own costs, including regulatory fees, are percentage-based and thus it makes sense for his to be.

It seems FTAdviser readers agree, with most of the vocal response accounted for by users saying their client actively prefer percentage fees.

One adviser did raise an interesting question, though: he intimated it was not percentage charging that offended the regulator, but ‘contingent charging’ where advisers are paid only if they transact a product sale.

Arch enemy

Another well-read story this week was an interview with Hargreaves Lansdown head of financial planning Danny Cox, who told FTAdviser that advice is not necessarily the answer for everyone and the Arch Cru debacle is a good example of how it can actually be riskier for clients as the funds were sold almost exclusively though intermediaries.

Surely this is an easy pop? The Arch Cru scandal has been well-documented and, yes, some advisers were seduced by the glossy brochures and did not look to see what was under the bonnet.

However, many others did their research, concluding it was a suitable investment for some of their clients based on the evidence at hand. These advisers have probably recommended many investments that non-advised investors would not have access to and the vast majority of these would have done exactly as intended.

How the fund was presented, how it was labelled by the controllers of the sector labels and myriad other issues contributed to its failure. It seems a cheap shot to use this to highlight the apparent risks of advice.