According to a recent study by Abrdn, 85 per cent of advisers are expecting a rise in overhead costs over the next six months.
Some 39 per cent believe rising costs could impact their business over the next year, with firms attributing concerns to simultaneously falling revenues due to clients’ invested assets decreasing in value (46 per cent) or because clients were withdrawing more from their investments (44 per cent).
As a result, just 26 per cent are or will be increasing fees charged to clients – 39 per cent for network firms.
Steven Rowe, director at Lucent Financial Planning, says while increasing fees to overcome additional costs is justified and that it is important that an IFA is profitable, raising client fees should be the last option once operating costs have been minimised.
While clients understand what's going on with rising costs, I'm not sure [increasing fees is] something advisers would consider ahead of better efficiencies internally.Wes Wilkes, Iron Market
He adds: “An adviser in financial trouble is more likely to give duff advice if they are focusing on ‘getting the sale’.
“However, this depends on the fee model: if fixed fees then the above stands; if a percentage of assets, then it’s not playing the game to the rules agreed at outset, which are that the adviser profits when the client profits and shares the pain when values fall.”
Wes Wilkes, chief executive at Iron Market, adds: “My gut instinct is that costs are a function of expenditure, not income. While clients understand what's going on with rising costs, I'm not sure it's something advisers... would consider ahead of better efficiencies internally to reduce costs and improve their offering.”
Reviewing business models
How the cost challenges impacts advisers will depend largely on their client acquisition and retention strategy; for example, working with families on their intergenerational planning, the implementation of technology and overall resourcing of the business.
These are areas that they can control, unlike the markets and the economy.
And while firms will be reluctant to increase their client fees, especially during a time of challenging investment returns, Richard Phillips, network development director at ValidPath, says there is scope to review the firm's fee income model versus the cost of delivering the service at a client-specific level to identify outliers who are costing money to serve, often for a historical reason.
Phillips adds: “For firms increasing their cost of servicing, this will be a last resort and may be implemented for new clients initially rather than applying to their existing clients, although applying the increase to all clients would be the easiest way to increase their revenues.”
