What are the different fee methods?
Advisers and accountants have traditionally charged fees in very different ways. Advisers typically get paid every month from their clients, with the fee deducted from the client’s cash account or platform, while most accountants still charge their clients on an invoicing basis once or twice a year.
Now, with the convergence of accounting and financial planning practices gaining momentum, how will the blended firms of the future charge their clients?
"One of the big challenges for accountants is that the way they charge is quite outdated compared to advisers. It means they have to manage work in progress and follow up debtors, which are foreign concepts to those in financial services," says Rob Hayward, Head of Client Solutions at Macquarie Wealth Management.
"Accountants are trying to work out how to start agreeing a fixed scope of work with clients and for fees to be deducted on a monthly or quarterly basis."
One way accountants are starting is by moving self managed super fund (SMSF) clients on to monthly fees, as all SMSFs have a cash account.
"Generally both advisers and accountants tell us that if they increase their prices, or move from invoices to monthly deductions, they are exceptionally nervous at first. But the impact after they’ve done it – as long as they do it well – is that the overwhelming majority of their clients didn’t even blink," says Hayward.
What fee methods can advisers use?
Most advisers charge their clients on a percentage basis, which can either be flat or tiered. Some advisers pick a percentage that suits the client’s scale, and some simply pick one per cent.
"If a client adds an extra $200,000 to their investment, the adviser effectively gets paid an ongoing fee on that $200,000 because they are charging the client on a percentage basis. It automatically allows for the additional advice required," says Hayward.
"Advisers who charge a percentage often believe they don’t need to increase their fees each year because market growth will increase their fees. If the market goes up on average 5 per cent a year, even if funds under management (FUM) stays flat, the adviser is earning an extra five per cent a year."
The downside of that is, of course, events like the global financial crisis.
"If you only had one service line and only charged on a percentage basis, you could see your revenue decrease dramatically and very quickly," notes Hayward. "Businesses with mortgages, insurance and SMSFs may not see that same drop. A business model with multiple service lines charging fees in different ways has a greater level of resilience."
In certain circumstances, advisers are prevented from charging a percentage fee on borrowed amounts used to acquire financial products.
The rise of fixed fees
Fixed fees are transparent and easily understood by clients, and the number of firms using this method has increased. However there are some considerations to weigh up when deciding whether to use this method.
"The issue with fixed fees is that if you don’t agree with the client to include consumer price index (CPI) increases, or an increase in fees every few years, if the client dramatically increases their portfolio or makes extra contributions, there is a risk that your fee base remains static," says Hayward.
Accountants can be much better at this than planners, because they charge on an hourly rate.
"A good accountant will advise their clients each year that the hourly rate is going up by CPI or another factor. People aren’t that surprised that hourly rates go up. If you’re disciplined about increasing your hourly rate you can increase the revenue of your business," says Hayward.
Advisers and accountants are increasingly seeking agreement from their clients in advance that fees will go up automatically year-on-year. Platforms are starting to facilitate this as well.
Putting a price on strategic advice
Advisers do a large amount of strategic work with a client, particularly in the first few years. Often, they charge a one-off fee to create a Statement of Advice.
"It’s almost like they’re charging for that document whereas realistically it’s the intellectual property of the business that’s been built up over years and years which has gone into coming up with an appropriate strategy for the client, articulating it and implementing it," says Hayward.
"By only charging a percentage on the assets, advisers are effectively saying to clients ‘all that work I did isn’t really relevant – the way I charge you is on the performance of your portfolio’," says Hayward. "I think that’s a major disconnect in the value of advice. I think more firms are talking about that and saying it’s not right."
With this in mind, some businesses now charge a larger fixed amount for that strategic advice, and then a lower ongoing percentage on their assets.
"What those firms are trying to say is there is large value in the advice I provide and the monitoring on that strategic component, and that deserves to be articulated as a fixed fee," says Hayward.
The move to multi-disciplinary firms
Because of the trend towards convergence between accounting, tax, SMSFs and advice, merged businesses are trying to figure out how to charge the client a single fee.
"Some of these multi-disciplinary businesses are giving clients three to four invoices a year for different services. That is annoying and frustrating for the client. So these businesses are trying to focus on how we improve this client experience over time – both in terms of their relationship manager internally who is their key point of contact, as well as how to provide the services and charge for them," says Hayward.
"Many firms are at the point of having an ‘umbrella fee’ that sits over the top of the engagements – but that may still manifest as different invoices. Some are going a step further and bringing all services together on the one invoice, and quoting multiple ABNs or introducing a new client engagement under a single ABN. There are challenges, but there are firms that are getting there," says Hayward.