It’s a topic we see raised constantly across the firms we support, and one of the most discussed themes in the market today.  

So, should advisers move toward fixed fees, stay with AUM, or do something in between?

Let’s dive in with a comparison.  

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The AUM model: strengths and limitations

Charging a fee based on a percentage of the client’s Assets Under Management (AUM) is very common.  

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Strengths include:

• Aligned interests
  There’s a shared best interest between adviser and client that investments perform well, both in terms of capital growth and resilience in turbulentce periods for the market. The client benefits from capital appreciation as they accumulate assets.

• Scalability and flexibility
  Clients with less assets will naturally pay less, and it tends to be the case that lower levels of assets are easier to manage – although this is a very sweeping generalisation and will depend on your own client target market! An AUM-based fee also provides a lower barrier to entry to financial advice for those who perhaps couldn’t afford a fixed fee. While this can be considered an advantage, there are Consumer Duty implications, which leads us nicely into limitations…
  

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Limitations include:

• Higher AUM can subsidise lower AUM
  Cross-subsidisation is where things get a bit muddy in terms of Consumer Duty. What if two clients with disparate assets need the same level of service or planning complexity? Here’s an example.  
  
  Assume one client is 45-years-old, earns £50,000 per year and has £500,000 split between a pension and an ISA with an objective of continued capital appreciation; a separate client is of the same age and has identical planning needs but only has £100,000. With a 0.75% ongoing fee applying to both, the client with £500k pays £3,750 a year whereas the client with £100k pays £750 a year.
  
  Is it fair that one client could potentially pay 5 times as much for identical planning needs?  
  

• Possible conflicts of interest
  Most firms genuinely act in their clients’ best interests. But if a firm earns money only from AUM-based fees, bias could perhaps creep into recommendations. If income grows when they manage more of a client’s money, they may be less motivated to recommend one-time transactions - buying an annuity, for example- because those assets would leave their management and reduce their fees.  

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‍The fixed fee model: strengths and limitations

Fixed fees are becoming more popular. But they do need careful consideration.  

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Strengths include:

• Transparency
  One of the biggest advantages with fixed fees is the transparency for clients. Fixed fees are easy to understand because the firm clearly lists what services clients will receive for their fee, and how it’s linked to the complexity of advice and recommendations provided to the client.
  

• Predictability
  Fixed fees are not market dependent, so what clients are quoted is what they will pay. No charge estimates or surprises! With a fixed fee, clients also know exactly when they’ll pay. In contrast, an AUM fee tends to be calculated on a daily average value so the true amount is never known until it’s taken from the plan.  
  

• Widely applicable
  Fixed fees can be structured for clients of all asset levels, and linked solely to the complexity of the advice. For a simple and more streamlined service that takes less time, the ongoing fee can be adjusted to reflect that. And vice versa.  
  

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What about the limitations?

• Can be high in percentage terms
  With fixed fees, the cost of providing advice is laid bare. Considering the cost of overheads to cover before the first pound is even managed, financial planning is not a cheap service – which can be a surprise to clients! For clients with less AUM, a fixed fee can seem expensive. On the flip side, clients with larger, invested portfolios stand to benefit the most from a fixed fee model.  
  

• Sudden fee rises
  As clients require more complex advice (i.e. move from accumulation into managed decumulation) the fee jump can be significant. It might prompt clients to reject a higher level of service, against their own best interests.
  

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What about a hybrid model?

When it comes to investing, we’re constantly reminded that a diversified portfolio spreads risk. What if we apply the same theory to advice fees?  

A hybrid model uses a fixed fee for the actual work and complexity of ongoing service, plus a smaller percentage fee based on the assets you manage. This approach is becoming more popular because it reduces firms’ dependence on market swings while keeping some income tied to the assets overseen.  

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Which model is ‘best’?

Across the hundreds of advisers we support, the best pricing model isn’t necessarily a flat fee, AUM or hybrid model.  

The ‘best’ one is the one that is transparent, documented, defensible and consistently delivered.  

With all of the above in mind, advisers need to ensure platforms and products can facilitate the fee structure, whichever one you choose.  

Be wary of basing it on the fact only your platform can support your fee model. If you can’t apply it consistently across all products and other platforms on your panel, you risk falling foul of the consistent client outcomes required under Consumer Duty.

Let’s reiterate: any model can succeed. It’s poor implementation, weak processes and compliance blind spots that you need to look out for!

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What if I want to try a fixed fee model but don’t know where to start?

How do you decide if a fixed fee model is right for your advice firm?  

Work out precisely the cost of delivering your advice service - or services if you have multiple levels – as if you are a client.  

Follow your typical advice process and log roughly how long it takes to complete every single step in the review process, from the pre-meting prep, the meeting itself, any follow-up actions / admin tasks, and of course repeated for how many times you see the particular client in a given year.  

This will give you a guideline of the ongoing fee you should charge to cover off your own costs and retain profit for the business.

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How can advisers choose the right fee model?

Here are our 5 expert steps to getting started:

• Assess your client base and value proposition

• Review your internal capacity and processes

• Stress-test pricing against compliance expectations

• Ensure documentation and service logs support the chosen model  

• Outsource and automate where possible  

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Final takeaway

There is no ‘right’ fee model, but there is a right approach. It needs to be clearly justified, consistently delivered and in line with Consumer Duty.  

Whichever model you choose, our Compliance experts can help you make sure your practice is structured to stand up to client expectations and the FCA’s exacting standards.  

Give us a call or drop us a line today to get started.  

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