Asset-based fees – what would advisers do without them?

New research has confirmed the continuing centrality of asset-based fees for financial advisers, particularly with respect to mid-tier clients.

The research, to be presented to today's Money Management Future of Wealth Management Conference in Sydney reveals the challenges advisers will face if they are forced to totally abandon asset-based fees and adopt an hourly fee model.

The research, conducted through August, shows that while advisers have comfortably reached hourly and sometimes yearly fee models with their high net worth clients, asset-based fees are the preferred method with respect to mid-tier or low balance clients.

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The survey showed that an annual fee was the dominant choice with respect to high net worth clients, with around 60% of respondents choosing this method, while asset-based fees dominated with respect to clients who were described as “medium-value” or “low-value”.

Importantly, the survey revealed that hourly fees appeared to be the least favoured option for advisers across all client types, albeit that around 12% of advisers used hourly fees when dealing with low value clients.

The Money Management research has also revealed that advisers expect to be servicing fewer but high value clients in the post-Royal Commission environment.

The future of asset-based fees remain under a cloud with the Royal Commissioner, Kenneth Hayne, suggesting that they appeared to have been an attempt to replicate the revenue stream that flowed from a combination of upfront and trailing commissions.




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This should read: Asset based fees - what would clients do without them?

Because if asset based fees were banned, then any client with less than say $1m simply becomes uneconomical to service.

I dont see Netflix, St John Ambulance, Telstra, the local council or a host of other major businesses operating on last centuries model of hourly fees. My office rent, my IT spend, my PI is not based on hourly fees.

What is becoming apparent is that a lot of low income people are slowly discovering no one really wants to advise them, because the legislation imposed on advisers is preventing them from doing so. What a disaster.

Steve, The companies you quoted charge a monthly set fee. Netflix does not adjust the fee based on the number of hours watched (which equates to asset based fees).

I agree Billy, I could charge a fixed fee for every client. Like Netflix I would not care if the client uses my services or not, or sits in my office for 5 hours every month. However I am not sure ASIC would see this as an acceptable fee basis. Therefore I would suggest you need a better example. Maybe a set minimum fee of $2200pa (as advertised by the not for profit CSC government super fund) would be more appropriate, but again I think ASIC would take a dim view of this for a $80,000 super balance. Help me out please, but I don't see how fixed fees can be used in real world situations.

You're halfway there, Robin. Its completely fine and accepted by ASIC to charge a minimum fixed fee or quote a higher annual fee if the client situation warrants this. We do this for every client every year. Doesn't matter if a client has a lower super balance, a service costs what it costs (like other professions) and it doesn't need to come from superannuation. The annual strategic advice covers a lot more than superannuation and if the minimum fee is prohibitive, consumers dont have to become a client until it makes sense for them.

Simply charging an asset based fee to everyone just means the higher balance clients are subsidising the lower balanced clients irrelevant of their actual annual advice needs. We have some clients with low super balances that command a lot more strategic work than those with significant assets. Fees are priced accordingly on a fixed annual basis.

Dear Reality, I tend to believe that ASIC also have a test for "better off". So the service may be costed absolutely correct at $5000, but if the client only has a small balance of $10,000 (exaggerated) then ASIC will declare the fee invalid. So we are still left with the real world issue of how to charge for a low value client when ASIC do not distinguish between investment sizes in their "mandatory requirements" in providing advice.

Dear Reality, I tend to believe that ASIC also have a test for "better off". So the service may be costed absolutely correct at $5000, but if the client only has a small balance of $10,000 (exaggerated) then ASIC will declare the fee invalid. So we are still left with the real world issue of how to charge for a low value client when ASIC do not distinguish between investment sizes in their "mandatory requirements" in providing advice.

Yeah, but you'd only charge someone with a $10,000 super balance a fee of $5,000 if there was a heap of other stuff outside that fund to advise on strategically leaving them better off, wouldn't you?

Your surprise me again. Do you charge $5000 for a large investment?, or only $300. I understood the law was the same for both a $10,000 super advice and a $3,000,000 super advice. So how can you spend less time on the small amount and meet the same standards?

It depends, Robin. Does the client have needs outside that super account/investment? Absolutely have some clients with lower investment balances that are charged more than clients with higher investment balances as their strategic needs are greater, requiring more hours per year.

Simple as working out how many hours required for the work required on a per-client basis. Charge accordingly.

If the client engages you for $5,000, it's up to them. I saw a tax return report for a couple of medium to high income earners last night. Normally they are charged $3,400 pa to do their tax. But this year they were charged $12,300 for the year. Fully legal under the rules. Amazing how ASIC has no interest in accounting fees.

I agre e. Charge any fee you like based on the advice required and the time you devote to the client. The balance of an account should not determine what the fee you will charge. Secondly, only charge the fee when the client requires a service. This is called fee for service (as other professionals). What other profession (or trades person) charges an annual fee to retail clients - none. In the financial planning industry an on going fee is a hang over from life insurance salesmen. Professional financial planners are now starting to charge fee for service when the client requires a service.

This is demonstrably untrue. There are hundreds of accountants and lawyers moving to retainers for retail clients. I pay my own accountant a retainer.

yes, many accountants moving back to fixed fees. I was talking to a very old accountant the other day - in his late 70's - they always charged fixed fees back in the day and it was a swings and roundabouts thing - he rues the day the management consultants got them all to go hourly fees.

Quite frankly there should be a market for both. Clients who want to make a value judgement every time they engage the provider I.e. is this 6 minute phone call worth it? And retainers for people who value on demand services , fee certainty and not making continuous value judgments. I pay my own accountant a retainer, I prioritise not having to sit and think about each email and phone call, I know what's coming out of my cash flow each year and I don't like endlessly paying invoices , this was my choice. Others might want an hourly fee. Let practices choose and let consumers decide what works for them. If retainers are such a shocking evil the market will were them out when they hear what a bargain their friends have with their hourly fee adviser.

Exactly. Let the market decide, which is being weeded out at the moment, due to the red tape regulatory burden being imposed.

This because professional accountants & lawyers have come to the realisation they have many ongoing operational costs (IT, education, staffing, rent, insurances etc] that must be paid, before the client seeking a "service" walks through the front door. Essentially its a minimum fee for the right to deal with your professional firm, but paid monthly. If you go out of business, you aren't meeting your clients needs long term. Keeping your doors open is in the best interest of your client.

exactly. I always tell my clients that, that the best financial planner is a profitable one. they love hearing it. tell them. clients love it.

they love it when i make money and drive a big fancy car. they are proud to have a financial planner like me with so many qualifications and designations.

they brag about me at bbq's saying things like but my planner has so many academic qualifications and designations, that's why he is so expensive.

people love paying a premium when they get great value.

and better still, he (over) charges by the hour...lol

A tiered asset fee, with a cap (which is the maximum monthly fee), equates to a service fee with no additional charge for extra FUM. Any amount less than that is a discount on the maximum monthly fee. The other issue that is conveniently overlooked in this whole debate, is that a fixed annual fee or an hourly fee, still always equate to some percentage of assets under management. At the end of the day, it's what the client is paying that matters. I note that the average FPA fee is approx $3,450 pa. As a general rule, I charge well under that, if not a fraction of that.

asic's view is that there is no benefit in any client paying other than an agreed fee ( not asset based) , no more than 1 year in advance, to be renegotiated each year specific to the work that will be carried out or is envisaged to be carried out, for the next year. The asset based fee will also be difficult to defend under the fasea code whereby the fee must show value to the client. Finally, ASIC won't tolerate doing the same or similar things for two clients, but one pays twice as much - which is a direct insight into asset based fees. They do not accept that higher client fum is higher adviser responsibility or risk. Adapt models or die, it's a choice.

Unless the asset based fee is tiered, with a maximum cap. In that instance, then the adviser fee is essentially discounting their fee to members with lower fund balances, for the same service. I haven't read anything in ASICs views that they have a problem with offering discounted fees. What I do see is that most of the population buy their phones on monthly fee plans, not upfront. ASIC doesn't seem to have a problem with that.

its not my logic, it's ASICS and you can argue with them if you like. The differentiation is we are a profession, fund managers/netflix etc are product providers. There is a different standard for each.

Actually, we are a service provider, just like any other service provider, except with a heck of a lot of ridiculous overheads imposed by ASIC. You would think we were delivering babies.

Actually, we are a service provider, just like any other service provider, except with a heck of a lot of ridiculous overheads imposed by ASIC. You would think we were delivering babies.

Maybe Union Super Funds should go onto hourly fees. They would go bankrupt in year if they did.

Bzoz said "Finally, ASIC won't tolerate doing the same or similar things for two clients, but one pays twice as much - which is a direct insight into asset based fees. "

Well then will fund managers and superannuation funds also be moving to an hourly fee? Why doesn't your logic apply to them to?

So product fees are going to a set fee and not an asset fee? And my tax bill too?

And of course no one will expect the clients to pay your fee in advance.
So what next when the client decides not to pay your hourly rate agreed fee or worse still now disputes the time charge.( billable hours)
I wish everyone good luck who thinks they can carry debtors of between $50,000 -$100,000 p. a. and then decides to then sue their now ex-clients who don't pay.

In case any of you think this is fantasy, I know of one adviser who has agreed fees for service of $18,000 outstanding involving 3 clients that still hasn't been paid, after three months.
Sounds like a great arrangement to me.

that's how accounting and law firms work, that's what ASIC believes will work for Financial planning.

Your FSG will generally need to disclose a percentage of FUM and/or hourly rate. You need to be able to clearly show how the fees paid by your client for that year relate to the services provided and is in their best interest. If you received $5k from a client who had $500,000 in super but disclosed your hourly rate upto $440 then your file needs to show 11 hours of actual time spent on the client file that year (and all work met the sole purpose test). If you only did a review and a couple of phone calls during the year (lets say 5 hrs total work by the adviser @ $440) but you still received $5k of ASF then your FSG disclosure is wrong. Your actual hourly rate in this example was $1,000 per hour and you are in trouble. The client was better off being charged for 5 hours @ $440 and you haven't met the client best interest duty because you charged them the higher of the two options

correct.

You will see hourly rates in FSG's change to be up to $1,000.00 per hour or on a scaled rate based on your argument. If it is ok to scale % by FUM then it is ok to Scale a $ rate based on FUM.

yes if your clients will accept $1,000 per hour and you can explain why you are worth that it would be ok

Absolutely agree

And what about pooled services? How do you allocate this to the client file? What happens if you meet an investment manager for a review of where the clients entire life savings happen to be that you have recommended (AND ARE RESPONSIBLE FOR), are we not obliged to continuously review and conduct due diligence, I know whose door they will knock on if something goes wrong. What if 50 clients are in that investment option and we devote hours to conduct due diligence and continual review for example. What if there is a change in legislation and you conduct hours of work for the pool of clients impacted by the change? How do you allocate and charge for this and show this in the client file? my point is not all services are one-to-one, hourly fees severely compromise the deliverability of pooled services. It also incentivises you to sit and wait for clients to ask you for services as you can only get paid when you do something. I've lost count how many lawyers and accountants i've seen let clients rot because they're just chasing the next billable hour. When you walk in through the door in the morning, you are incentivised to go "where can I make money through billable hours" , everything else goes to the bottom of the pile, there is no incentive to be pro-active with any or to even look past today or the next hour. Anyone who has worked with lawyers or accountants have seen this behaviour, hourly fees are not a panacea and they severely disincentivise investing in your business for the client base as you cant commit to fixed overheads like you can under a subscription model.

What about the surgeon who goes overseas to learn a new procedure? How does he/she charge clients for this "pooled" life enhancing service? It is built into their pricing as you should build it into yours.

And the surgeon charges $1000 an hour. That is "professional". $300 an hour is FIFO iron ore truck driving stuff.

I'm not saying its a panacea, I'm just telling you what's coming. You can argue it with the regulator. In your example, yes, you can spread your time in researching items across the client files. No it doesn't incentivise you to sit and wait for clients to ask you to do something - even lawyers would go broke if they did that. You need to understand your clients and come up with strategies at a price that they are happy to engage on. Can't commit to fixed overheads? Have you seen the offices lawyers work out of? You can fight change all you like and good luck if your business model remains competitive and sustainable when others will be creating new models.

Hourly fees are certainly not a fait accompli, its interesting that they are being discussed as such. I have no issues with annual renewal and a fixed fees, thats easy and our business model could turn that on with ease, we are almost here anyway. What is vital is that the same fee restrictions apply across the industry i.e to super funds, advisers and even robo-advisers, Uniformity of charging restrictions will ensure that its not armeggedon for any particular segment as it will prevent "regulatory arbitrage" on fees and if a consumer wants advice they'll have to pay for it the same way wherever they go

Very simple. increase your hourly rate to $1000 an hour. Problem solved. There is no legislation that discusses what your hourly rate should be (that rate will include your PI bill, your IT bill, your compliance bill, your office rental bill, your office staff wages), obviously.

That's true. You can increase the disclosure on your FSG to $1,000 per hour. The client can then compare your FSG to others and make an informed decision as to who to work with. As long as you are disclosing the correct hourly rate that is fine

A client charged a maximum of one hour at $1,000 is paying half what a client who is being strung out for 5 hours at $400 an hour. It all totals up at the end of the day.

So what is it? Did you spend 1 hour or 5 hours working for the client? Charge whatever you want per hour (disclosed and agreed by client) but ensure your file supports the time you spent on that client that year to pass an audit.

@ Bozo & Anonymous,
You've both missed my point !
Comparing your businesses to an accounting one with fees of more than $500K + is unrealistic.They can carry 20.0% of their fee base in debtors, but I'm sure most financial businesses can't.
The question of billable hours is a very sore point with legal firms and even if you can justify those billable hours doesn't necessarily mean you will get paid.
There will be moments in time where clients portfolio's have lost money and you always need to justify your position and fees
I'm confident most fee for service advisers will not reduce their fees to compensate clients when that happens.
This is not about what's disclosed in your FSG nor is what was agreed to by clients.
It's about perception from the clients perspective and most clients are not forewarned in advance on how many hours it will take to produce a SOA or a review document.
That usually comes at presentation time.
The same as it does when lawyers produce their advice document along with the invoice.
In the real world you will need to consider .... "what next!"
Good luck.

why can't we carry debtors like other professions? Why the difference? As to clients forewarned about what it will cost to do an SOA? Of course they, it's call an engagement document and we tell them what it will cost before they proceed. Are you saying you prepare the document, present the advice and then tell them how much it will cost because of the value? The Code's say you must prepare an engagement document.

You know as well as the rest of us that this kind of fixed cost estimation with leeway for certain scenarios is just a breeding ground for conflict between advisers and their clients. Quote a standard SOA/Implementation fee, next thing you know through no fault of the client or the adviser the super fund decides to delay authorities/rollovers 2 months and have to be charged accordingly. Who can say for certain that clients would find this a more valuable/fair model than the current pooled asset fee model? Maybe there needs to be discussion around who gets to decide, a client and their adviser or a bureaucrat divorced from reality with an illusory vision of how everyone else ought to act. A pervasive issue in our society it seems.

Alleycat. It is the cost of doing business having to chase up debtors and having some who don't pay. Just like these costs are built into prices of goods at shops to cover stolen goods, your hourly rate needs to reflect this. The superannuation cookie jar should not be used as a reason to ensure you don't have bad debtors.

I would love to be hourly fees, I get rewarded for inefficiency and have increased business costs. Yay! Furthermore there's NOOOO conflict in hourly fees, haha. I know some accountants and lawyers who charge what the client will bear which only has a loose affiliation with actual hours worked. This is definitely a model worth emulating. NOT.

We charge annually by monthly direct debit, not by asset fees.

If the client is unhappy and leaves we don't charge next month. Simple.

If a client doesn't have enough money to justify our minimum fee we tell them they shouldn't engage us. They still sometimes as they desperately want the help and are prepared to pay. That minimum gets much higher every year because of increased compliance costs. Maybe they should all front up to ASIC for advice if ASIC reckons it's so easy?

Cars are the best analogy. Assuming they have no mechanical problems all do the same job, Is a high end sports car worth 20 times a small 4 cylinder?? I don't know, it depends on the customer and how they perceive value.

Sounds reasonable Wildcat. How do you calculate the monthly fees a client pays? More importantly, do the services you provide (and costs charged) align with the hourly rate in your FSG?

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