Adviser warning: Rethink asset-based fees

by |

Asset-based fees may create just as much conflict of interest as commissions, says a law adviser to financial services firms.

The Fold managing director Claire Wivell Plater, said asset-based fees would create incentives for advisers to recommend strategies that maximise the assets the manage for the client.

“The new Conflicts Priority Rule means that advisers cannot recommend strategies or products that create extra revenue for themselves or their licensees unless they can demonstrate additional benefit for the client,” she said.

Although the government is not banning asset-based fees, Plater said they were making it increasingly inappropriate to charge them. She predicted a fee structure based on the work done by an adviser, rather than 100% asset based.

Plater compared the rule to the government’s new anti-smoking legislation in NSW that bans smoking in places like transport stops and entrances to NSW public buildings.

“It’s similar to the legislation surrounding asset-based fees. Advisers aren’t specifically banned from charging them – but if they do, they risk either falling foul of the Conflicts Priority Rule or not being adequately remunerated for their work.”

She said advisers needed to define the terms of engagement from the moment they first meet with a client.

“If the service proposition and the client’s fee commitment are clear from the minute the client walks in the door, the financial aspects of client relationships become easier to manage.”

  • Claire Wivell Plater on 11/01/2013 4:43:46 PM

    And Peter Johnson, you're so off my Xmas present list!

  • Claire Wivell Plater on 11/01/2013 1:07:36 PM

    Guys, guys, guys. Of course advisers can and will use asset based fees where they are appropriate. Where advisers provide an ongoing service and manage the clients assets, asset based fees will be appropriate and easier to administer. But if the adviser’s services are not product related – and ASIC has made it clear that the best interests duty requires advisers to provide non-product-related solutions where appropriate - other forms of charging will need to be developed. Lots of advisers do this already. I suspect advisers may end up with a menu of options for clients.

  • Pat on 11/01/2013 9:20:27 AM

    Bob, a bit more thought required please:

    1. You cannot state, on the one hand, that timesheet based advisers will pad timesheets unethically but asset based fees will always advise clients to pay off their mortgage first. Unethical behaviour occurs in both areas.

    2. I said "used to". The extention 'd' to the word "use" implies past tense. I am well aware of what FOFA will stipulate.

    3. If you get what you pay for, does this imply you put your clients into the most expensive funds available? Think again: index funds are some of the lowest funds available and continually beat most of the more expensive, active funds available.

  • Bob on 10/01/2013 1:08:42 PM

    Pat, we always advise clients to pay off their mortgage first, lower cost does not necessarily mean better bottom line ( in fact it is often the opposite - you get what you pay for) and under FOFA you can't charge asset based fees on the geared amount (not that we have ever done that anyhow).

  • Pat on 10/01/2013 12:37:09 PM

    Bob, you may well give examples of padding timesheets. What about the number of advisers who recommend clients allocate cashflow and capital to portfolios upon which they can charge asset based fees rather than alternatives like: mortgage repayment; lower cost super funds; etc? How many advisers used to gear up their clients so they could charge asset based fees?

  • Peter Johnston - AIOFP on 10/01/2013 12:20:39 PM

    What utter trash. Just another lawyer trying to complicate matters for their own ends.

  • Bob on 10/01/2013 12:03:25 PM

    My clients are charged asset based fees which are fully disclosed, so what is the problem. My interests are aligned with my clients - when they do well I earn more and if they do poorly then I would earn less. I don't have any coflicts regarding which investments to recommend - Hypothetically I could suggest 100% cash & I would still be paid at the same rate. My clients don't have to worry when they contact me for help or with questions that they are being charged by the minute, so communication between them & myself has no cost barriers resulting in a better relationship with them and a much stronger "know your client proposition". Some years ago I used to work for one of the big Chartered Accounting firms and there was always pressure to get your billable hours up, so when preparing our monthly time sheets all the staff used to fudge their hours to achieve this aim - end result was that some clients got charged for time that wasn't spent working on their affairs.

  • GAB on 10/01/2013 11:03:22 AM

    So you would prefer we charge like lawyers do? I don't recall seeing many clients happy with their legal fees. I sent a client off to get a pretty standard will prepared by a lawyer i thought i trusted. The said lawyer slugged the client $240 for a 10 minute appointment with me to discuss the super beneficiaries form. I won't tell you what the total bill ended up being....but it was disgusting. A set fee you reckon, for the job? I refer to your last paragraph “If the service proposition and the client’s fee commitment are clear from the minute the client walks in the door, the financial aspects of client relationships become easier to manage.” Lawyers should fix up their owen backyard many times have your clients been stung by a massive bill they didn't expect. Why don't lawyers provide a quote or costing upfront? Financial advisers do. We disclose every cost. I charge asset based fees for most my client base. It makes sense as i'm managing a portfolio of THEIR WEALTH constantly. I manage their fears, emotions, greed, family issues. Asset based fears align my interest with the clients. They like it, they understand it....what they don't understand is how their lawyers charge and why they don't get told upfront what the fee will be. I've got another client in a custody battle, and i tell you, i've never seen such fee ripping from two law firms in my life. The first firm looks like being sued for negligence. How the ordinary person can afford legal advice...well they can't...and you want us to charge like that? Go fix your own industry first.

WP forum is the place for positive industry interaction and welcomes your professional and informed opinion.

Name (required)
Comment (required)
By submitting, I agree to the Terms & Conditions