Firms use different types of fees to differentiate themselves from their competitors. However, does charging a fee one way over another make a huge difference to the quality of service provided?
Historically, in the financial services world, fees were mainly charged as commission. More recently, percentage-based fees have become commonplace. However, there are now financial advisers who offer ‘fixed fees’ and even some who charge on an hourly basis.
As the ways in which you can pay for professional services are quite varied, read on for a look at the pros and cons for each fee type.
‘On the clock’ – traditionally used by accountants and lawyers.
- You shouldn’t be charged more than the time taken to complete the work.
- It can be more expensive than other options, particularly for more complex or time-consuming cases.
- You do not know how much advice will end up costing. If the task is more complex than originally thought, it could cost more than expected.
- It is hard to determine how much time should be spent on a task. This can lead to ambiguity and, in a worst-case scenario, dishonesty and abuse. e.g. one hour to write a letter, when it only took 30 minutes.
- It can be more time-consuming for the company to undertake and invoice – leading to potentially higher charges.
A flat fee for clearly outlined outcomes.
- You have certainty over your costs. Alongside a clearly defined scope of services, you know you will get what you pay for without any nasty surprises.
- It will not incentivise working slowly (to increase hours taken and therefore the fee). Conversely, fixed fees could incentivise corners to be cut.
- If the work is more straightforward than expected, you may overpay for the work.
- A fixed fee can usually be paid either directly or facilitated via an investment platform or product.
Percentage of assets under advice or management (AUA / AUM)
- A relatively simple way to charge.
- You may underpay or overpay due to the simplistic nature of the charge. For example, 1% of a £20,000 investment is £200, but 1% of £1,000,000 is £10,000, whereas the time cost to provide the advice may be, for example, £2,000. Note – This time cost doesn’t account for the higher risk (and professional and regulatory costs) to the regulated firm on larger investments.
- A percentage fee generally provides more people access to financial advice, particularly individuals who have just began saving for the future.
- Arguably it aligns the investment manager’s interests with your own as increased portfolio performance benefits both parties.
- It can easily be facilitated via an investment platform or paid directly.
You wouldn’t pay anything directly to the adviser, but the fee is included in the price of the product.
- Commission is opaque. It is unclear how much the advice/service will cost you overall.
- It creates conflicts of interest. An adviser may offer you the product which provides them with the highest (or higher) commission.
- Due to the above, commission has been banned in many developed regulated markets for some time now although not in many typical offshore expat markets.
- However, commission is still used on protection products (such as life insurance or income protection). This allows you to access advice to obtain to correct and relevant cover without having to pay a large upfront fee to an adviser. Therefore, when used with protection, commission may be in your best interests.
Although not strictly a payment type, it’s important we mention it. It’s usually as a fixed fee, percentage fee, or commission basis, but only payable if you proceed with advice given.
- Creates a conflict of interest for an adviser to recommend a new product. For this reason, it has been banned by the UK regulator (FCA) for Defined Benefit pension transfer advice.
- You must pay a fee only if a recommendation is implemented.
In practice, the type of fee payable usually depends on the exact service you require and, also, how you as an individual feel most comfortable paying.
Choose the right option for you
A good professional services firm will offer you a variety of options to pay for their services. This ensures you can select the most suitable payment method for your needs.
For more information regarding our financial planning and investment management services, please contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.
Note – The information in this article is correct as at 1st November 2020.