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Why advisers should rethink their charging structures

Why advisers should rethink their charging structures

Advisers should use the opportunity of Mifid II’s introduction to rethink how they charge their clients, according to Danby Bloch.

Speaking at the Personal Finance Society’s Festival of Financial Planning, the chairman of Helm Godfrey and former non-executive director of Nucleus said advisers needed to question how they value their work.

He said: “Successful firms are rethinking and redesigning how they charge and how much they charge.

“It is really important not to just lay back on your laurels and see this as how you have always done it. Times are changing so keep reviewing charges.

“This is a particularly good moment to do this because we have got Mifid II coming up and it means financial advisers will have to tell their clients each year how much they will be charging them over the course of the year and at the end of the year they will have to give them an account of how much they have ultimately charged.”

Mr Bloch said most firms still charge on an assets under management basis, which was “quite crude and rather indiscriminate”.

He said research had shown it made sense to look at other ways of charging.

Mr Bloch said: “It is not always the case that the value of advice and the value of a client’s portfolio are naturally meshed together.

“A 1 per cent fee perhaps would not be enough or it might in some cases be too much. Value comes from a whole range of things.”

Earlier this year the Financial Conduct Authority published research which showed advisers overwhelmingly get paid through “facilitated payments” through the provider.

The FCA's data, collected from advisers' Retail Mediation Activities Returns, showed 81 per cent of initial charges and 78 per cent of ongoing charges are paid this way.

The remaining proportion of fees is paid directly by the client to the adviser.

Meanwhile there appears to be an overwhelming preference for percentage charges, with more than 4,000 firms using this charging structure for both initial and ongoing charges.

Charges by the hour were only used by 1,663 firms for initial charges and 1,259 firms for ongoing charges.

Last week, at the Personal Investment Management & Financial Advice Association (Pimfa) annual summit, the Financial Conduct Authority has ruled out creating a cost disclosure template to help advisers explain their charges under the new Mifid II rules.

But the regulator has agreed to work with trade bodies on their own versions.

Megan Butler, executive director of supervision for the investment wholesale and specialists division at the Financial Conduct Authority (FCA), said the disclosure regime under the new Mifid II requirements was “probably not perfect.”

Mifid II requires investment firms to explain all costs ex-ante, before the client invests, and ex-post, which means periodic reporting after the client has invested into a fund about annual management fees and advisory charges.