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IFA cites percentage ‘unfairness’ in move to flat-rate fees

An IFA firm is going through a “cleansing operation” to put all clients on a flat-rate, fixed fee basis for upfront and ongoing review charges, arguing that percentage-based fees are unfair on clients as the same amount of work is done on a portfolio no matter what the value.

In an interview with FTAdviser, to be published later today (10 January), James Williams, IFA and managing director of Proactive Financial Management Ltd, said the intention of the ‘cleanse’ is to ensure no clients are left paying a percentage fee.

He added that when the Retail Distribution Review was mooted, it was clear that taking a percentage “might be frowned upon”. Reviewing the charges, Mr Williams said the business came to believe they were unfair as clients were paying larger sums for the same amount of work.

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He cited, as an example, that if the firm is looking after £100,000 for Mr Smith and £50,000 for Mr Jones, “apart from risk under management, what difference in work is there?”.

He said: “There isn’t any difference so when we decided to flat fee people for reviews then it seemed to fit into our vanilla-based business model.”

On the whole, clients will be charged a single £1,500 initial fee administration, with ongoing reviews priced at between £300-£1,200 depending on whether they are quarterly, half-yearly or annual.

An element of percentage charging remains, as clients will also pay a 1 per cent adviser cost on any transactions undertaken.

Mr Williams said: “Most people, I believe, are still charging 3 per cent and a half per cent – that’s what we were doing five years ago.

“Our transactional costs for setting things up are partly percentage-based and partly transactional based, [but] the customer pays a [flat] set-up cost for the administration.”

According to Mr Williams, the firm haa not had any complaints from clients about the fee structure and they have not had a client pay via installments.

Mr Williams admits that some clients, particularly on the pension side, ask for the firm to take the fee out of the investment and “that is perfectly acceptable”, but the majority pay out of their own pocket.

He added that Proactive’s clients now pay less than they did in the pre-RDR world.

He said: “On a £150,000 investment case, we may have charged 3 or 5 per cent so that is 3 to 4 per cent, £4,500-£6,000, set-up commission and of course the 0.5 per cent played a part on top of that.

“So in year two it would cost £5,250. We would now charge a £1,500 fee now for the measurable administration plus 1 per cent for the adviser cost – so I’ve separated the work load involved by somebody else other than the adviser and the 1 per cent represents the risk that we are taking on and the adviser actual work and remuneration.

“Therefore the initial costs in that scenario represent £3,000. It’s a huge difference so on an investment case like that it’s cheaper to set it up and we charge £600 a year for a client contract to be reviewed.”