Despite the FCA saying percentage-based charging doesn't quite fit with "RDR philosophy" it is still the preferred billing method for many IFAs and clients, writes Henry Brennan
It is just over a year since the introduction of the Retail Distribution Review (RDR) and, despite some misgivings from the regulator, a percentage based charging structure is still the preferred method among the majority of IFAs.
Pre-RDR, designed to challenge the more opaque aspects of the financial services industry, some 76% of advisers predicted they would use a fee structure in which they charge as a percentage of assets.
Nearly a year later, research carried out by Aviva and conducted among a much larger sample size, found that 83% were either charging a percentage of clients' initial investment, a percentage of their assets under management, or a combination of the two.
Why advisers and clients still prefer percentage-based charging
More recent research from website Unbiased seemed to confirm this remains the preferred method among both parties. The research found that, among consumers who had sought advice, the highest single proportion – one in five – paid for the advice out of a percentage.
In the background to all of this, the Financial Conduct Authority (FCA) has expressed unease over the use of anything other than ‘pounds and pence' but has stopped short of taking any definitive action against percentage charging.
A report into the implementation of RDR released towards the middle of last year contained the warning that consumers may struggle to calculate the cost of advice when they have to work out how much they will need to pay from percentages.
FCA chief executive Martin Wheatley went a step further when he told delegates at the Financial Service Authority's last annual conference in July that he harboured concerns over advisers charging fees based on a percentage of client assets, in that it may not entirely comply with the aims of RDR.
He said: "In some cases, firms are charging a percentage of product investment, and clearly it takes away product bias in the sense that we are no longer seeing firms recommending particular products because of the payment that comes to them.
"But it does not take away dealing bias, because if you only get paid if people buy a product, then you are going to want them to buy a product rather than pay off debts or do something else.
"There are some concerns about whether that is entirely compliant with the philosophy we have set out."
Advisers are largely undeterred and have said that these misgivings fail to deal much credit to investors who are more than capable of keeping up with a charging structure relative to the product.
Lawrence Hornsby, an IFA with Throgmorton Private Capital, continues to charge on a percentage basis and said clients are more than capable of understanding the process.
He explained: "People understand it. Generally speaking, it is not a hard concept to follow. The regulator does sometimes look at people as if they are idiots.
"People are not stupid, they understand what they are paying, they understood previously what they paid even though it wasn't a direct charge to them, they understood that something is not done for nothing."
Graham Grant IFA director Graham Grant has elected to offer both a fee-based option as well as a percentage-based one in order to manage clients more effectively on a long-term basis.
He said: "It depends on what the client wants. I am quite happy to do percentage and also do a fee. For low net worth individuals, I tend to charge a percentage. For high net worth, it tends to be fee.
"A young couple was earning around £15,000 a year and, rather than paying a fee up front, I decided to take a percentage of the monthly ongoing investment into the ISA. This was done with the view that it they would develop into a bigger client eventually.
"As they climb up the ladder in their chosen professions, more opportunities for planning will come around."
Thomas and Thomas Financial Services director Darren Lloyd Thomas says there needs to be a greater distinction made between initial and ongoing fees charged on a percentage basis, at the risk of losing both options.
He said: "The danger then is that the regulator says no to percentage charging, full stop. What that will do is help at the front end but will greatly alienate the client from the adviser. The beauty of a percentage relationship is that, if my client's portfolio rises, then I get paid a bit more. I then have some inflation proofing in my model.
"Equally, when markets fall and my clients are struggling, I will experience some of that pain. That is the way fund management has worked effectively for years."
Some of the concerns surrounding percentage charging stem from the idea that it can represent ‘commission under another name' from the product and deliver pressure to sell.
Too broad a crackdown, however, would stand to unnecessarily derail scenarios where this approach works best for both client and adviser.
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