Advice fees – their quantum, and how they are charged – remain one of the most discussed, dissected, and debated topics within financial advice. They are at the heart of many issues fundamental to the future of financial advice – practice sustainability, affordability and take up of advice, and client trust.
In an earlier article, we explored questions around ‘what’ to charge for advice, examining critical considerations for advisers seeking to strike the right price for their service. In this follow-up article, we explore the ‘how’, examining the different fee methodologies and payment methods advisers can use. We will examine the topic from both sides, looking at the advantages and disadvantages of different fee models, usage trends for the different models, and client preferences. We also look at the often-vexed issue of how to communicate fees, and the value of advice, in a way that reinforces client trust in the individual adviser and the advice itself.
Different fee models
1. Flat or fixed fee
While different people interpret the concept of a fixed or flat fee differently, in essence it is the opposite of a fee linked to variable components, whether that be AUM, or hours spent with the client. A flat or fixed fee is generally taken to mean a set fee, agreed in advance, for the year ahead for all the work the adviser is likely to do for that client. It doesn’t mean you need to charge every client the same fee (a point explored in point 2 below)
2. Tiered fees
Really a variation on the flat or fixed fee, under the tiered fee option, clients are grouped into tiers based on the depth of the services provided to those tiers, and all the clients in that tier pay the same amount as each other. This approach might work well if clients can be fairly easily segmented based on complexity and workload. A fee pyramid (e.g., gold, silver, and bronze) and fee menus are commonly seen with this model.
3. Asset-based fee
The asset-based fee is typically charged as a percentage of funds/assets managed (AUM/FUM) by the adviser for that individual client. By its nature, it is a variable fee, the quantum of which is at the mercy of investment returns, and which therefore can’t be known in advance.
4. Hybrid fee
Typically a combination of a fixed fee and a percentage-based AUM fee.
5. Hourly rate
An approach used by many professions who provide services on a more episodic basis, such as accountants, doctors and lawyers. Under this model, the client is charged based on the amount of time the adviser spends working with/for each client. The hourly rate is usually a fixed rate, known in advance. In its purest form, the adviser is valuing an hour of his time at the same rate, regardless of the client. A variation on this model is that different employees working on that client may charge at a lower rate. So, an hour of a paraplanner or client services manager may be charged at a lower rate than the actual adviser.
6. Project-based fees or modular fees
In contrast to an hourly fee – where a simple hours worked x hourly rate calculation applies – project-based fees are set (and quoted up front) based on either a cumulative estimate of the time to complete the project for the client (working backwards from the value of an hour of the adviser’s time), or based on the perceived value of the project for the client (and what the time is worth to the client).
Typically, a project will be self-contained and on- off in nature, with common examples being advice around life insurance or estate planning. A variation of the project fee is the advice module fee, where the advice process is broken down into distinct – often linear – modules, which are undertaken individually (such as cash flow and budgeting, superannuation, saving for and buying a home, and so on). Another variation is breaking down the advice process into steps, such as initial advice, implementation, and ongoing care, with a different fee levied for each of those steps.
7. Commission
Although not strictly a fee model, advisers can still choose to be paid for their advice in relation to life insurance via commission, capped under law at 60% of the value of the first year’s premium, with a 20% commission payable on the premium at each subsequent annual renewal.
To continue reading and receive CPD points, view the original article on AdviserVoice’s website.
