In this latest Adviser Hangout video, I talk to Chris Daems of Principal Financial Solution about his decision to move all the firm’s private clients to a monthly retainer fee, collected from their bank accounts! Yes, that’s right – he is moving away from percentage of AuM and product-based adviser charging!
I asked Chris why he is making such a ‘crazy’ decision, especially when there’s no regulatory impetus to do so and many people in the industry would consider AUM model a stronger business model. Chris explained that his inspiration came partly from his accountant, who operates a similar model and having gone through the transition with about a third of the firm’s clients, so far just one client had objected to collecting the retainer straight from their bank account.
Chris says he has no particular objection to the percentage of AuM fee model and the reason he’s doing this is to ‘separate the church from the state’ by completely eliminating products (and product providers!) from how the clients pay for the service the firm delivers.
What do you think? Has he got it wrong?
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This is an interesting situation, and one that I tried about 8 years ago. I persisted with it longer than I should have out of sheer belligerence but ultimately shifted away. Like Chris I found very little resistance to switching clients across to this method of payment, which was banded based on the level of service we were providing, which was loosely linked to the value of assets we were looking after – the more money they had, the more complex their situation and the more work we were doing.
However, over time we found that clients did not like this charging method as much as they liked the AUM method. Some clients did not like the ‘pain’ of seeing a monthly amount leaving their bank account, particularly at some of the fee levels we were charging, and especially in the months where there was little or no direct interaction.
Then when the crash of 2008 came, clients went into austerity mode, and looked at ways to reduce their expenditure, or other drains on their finances – the monthly financial advice fee was an easy thing to switch off for some clients, just at the time when they probably needed more hand holding, not less. Alternatively they would shift down the scale in terms of the level of service they wanted to retain me for, again at the time they probably needed more service not less.
Accountancy is dissimilar to financial planning/advice because much of it is considered as ‘compliance’ by the client, whereas financial advice can be deferred until a later date, or whenever there is a life change. We found we were spending at times as long on the fee discussion/justification as we were on the advice – not in the first couple of years, but in the subsequent years and post 2008. When we asked our clients which fee model they preferred it wasn’t the retainer model.
Chris has put across his reasoning very well. My model is a bit of a hybrid having read what Dennis was trying 8 years ago and the problems he then found with it, I was able to learn from Dennis’s mistakes (Thanks Dennis) without making the same ones. Our model hasn’t changed from before RDR and still has room for change and will change I am sure, but the problems Dennis has highlighted are one’s I have seen too.
As Chris said a % based model is no better nor worse than a fixed fee model ( it depends on your client base, your mind set and that of your clients). The FCA had no research to provide the commission model was broken (as we know) and I changed to fee based pre-rdr so I am not banging a drum for return to a commission model, BUT the FCA issue over fees being contingent upon implementation misses the point that to be a good adviser you don’t just have to give good advice, you NEED to be a good enough salesman for the client to implement your advice. With commission if you were not you didn’t get paid. On a pure fee basis one of the incentives is removed which as was seen with stakeholder, has implications for the consumer as price is not everything and people do need to be “sold to”.