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Advice Charging Models – The Debate Rages On

Andrew Hewison
Managing Director
2 Mar 2020

This week’s blog was prompted by an article recently written in the personal finance section of the Australian Financial Review.

The article outlined the various charging models used within the financial planning profession, however; there was heavy commentary in support of fixed fees over the alternatives, including asset-based fees.

It concerns me when industry identities degrade one model over another when the real issue for financial planning clients is whether they are receiving ‘value’ from their adviser in exchange for the agreed fee paid.

Regardless of whether an adviser charges a fixed fee, an asset-based fee, and hourly rate, or a hybrid of each, the cost is agreed between Adviser and client. Thankfully, Advisers can no longer receive third party payments (commissions) for wealth advice that may influence their product recommendations.

I’m very happy to admit that Hewison Private Wealth (HPW) operate an asset-based fee model as we believe it is the fairest model available.

HPW advocates an asset-based fee for the following reasons:

  • Strategy and investment go hand in hand. If you get one wrong, it devalues the other. Hewison Private Wealth takes responsibility for the success of both. That said, an asset-based fee ensures that if the client suffers due to poor investment performance, so do we. We think that is fair and so do our clients.
  • An ongoing, asset-based fee allows us to be available to our clients 24/7. Clients know that if they need us for any reason, they can pick up the phone without fear of additional costs being incurred. It also allows us to be proactive in our advice and management.
  • The Corporations Act makes it illegal to act in a manner that is not in the best interests of the client, which includes providing advice to inappropriately bolster the F.U.M managed. Furthermore, it states that an asset-based cannot be charged over borrowed funds.
  • Proponents of fixed fees argue that asset-based fees devalue strategic advice given the fee structure is tied to assets, which is rubbish, but this then implies that investment management should be free, if managed in-house. Returns don’t magically appear in the client’s portfolio! History has shown us that generally, larger portfolios bring with them more complexity requiring in-depth strategic advice, a broader investment strategy and more frequent review and an overall greater risk for the Adviser. That said, where the scope of services is specifically narrowed according to a client’s needs, the fee percentage can be reduced. For example, a not for profit entity that only requires investment management.
  • The Corporations Act also allows Independent practices, such as HPW, to charge an asset-based fees as it states that given the fee is agreed by the client and adviser, there is no conflict of interest to manage.
  • HPW charges on a sliding scale as we do recognise that at a certain size (around $5m+) the amount of work required to manage the client does not continue to exponentially increase. Again, it’s about recognising value and fairness to our clients. Some large institutions still charge around 1% to manage $20m portfolios, but that is their right, so long as their clients see the value.

Surveys have shown that no model is more expensive that the other. The average advice fee on $1 million invested is around 1%, regardless of the fee structure.

I am reminded of the saying – “Oils ain’t oils”. Well, neither are financial advice businesses. We all do things differently. HPW, for example, take responsibility for strategy, investment and administration, whereas others outsource investment and administration through a third party, typically a platform. How we charge will vary accordingly.

Commissions from wealth products are gone, thank god! An adviser’s time is now better spent demonstrating the value of the advice services they provide to their clients for the fee paid. The methodology is irrelevant, the value received is.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.