Retainer model gains ground as IFAs' ongoing fees feel heat

Did anything interesting happen while I was away? Only an FCA ban on contingent charging on defined benefit transfers!

One of the most hotly anticipated regulatory announcements of recent years, and I was on holiday. Thankfully, my news editor and the team know a thing or two and told me to get back to painting my back room.

You may remember that NMA sent its own thoughts to the FCA. In the end, we found readers were divided over whether a ban was a good idea. Our own position was that contingent charging probably could be kept, if (and only if) the FCA’s oversight and control was better. Moreover, a ban would be useless without measures addressing other significant incentives and conflicts. Funnily enough, this is precisely the point made by readers.

The bigger prize is that ongoing advice fees are paid for from large transfer values – hence the contingent charging ban does not address this, arguably larger, conflict of interest. - Ricky Chan, IFS Wealth & Pensions.

Indeed, ongoing charges are an issue. We agreed firms should show why the scheme they recommend is more suitable than a workplace scheme. The FCA itself said it was ‘not easy’ to tell whether ongoing charges, or other factors, had more influence than contingent charging. With this latest decision, the FCA is placing its cross-hairs on ongoing charges, which it described as among ‘substantial conflicts of interest’ advisers face. But the FCA goes further. ‘Our view’ it said, ‘is that many consumers would not benefit from ongoing advice, as their circumstances are unlikely to change significantly from year to year.’

Funnily enough again, Initiative for Financial Wellbeing chair Chris Budd recently argued in an article for NMA that firms should do more for their ongoing fees. It is no longer good enough to charge 1%, or more, and not provide a substantial ongoing service with coaching at its core.

So what does the ‘modern’ firm provide? The simple answer is that it provides financial planning. At the very least there will be an ongoing proposition, a review process. I would also suggest cashflow modelling and forecasting is a prerequisite. But even that will not always be enough. The truly modern firm will also have training and knowledge of coaching skills, behavioural finance and financial wellbeing too. This is how you can distinguish yourself in the marketplace right now. - Chris Budd

Last year, I interviewed Michael Kitces, who has become a much listened-to voice in the US financial planning community. He wanted planners to consider replacing percentage fees with a monthly retainer.

We don’t charge fees in a way that fits how most working people pay for things, which is not giant lump sums all at once. Instead [the initial fee] is amortized over 12-month periods to make the cashflow manageable and it suddenly makes it much more accessible, particularly for young people.’ Michael Kitces.

Intriguingly, after I posted about this on Twitter last week, NextGen Planners founder Adam Carolan revealed the retainer model was now being experimented with by some advice firms.

@Adam_Xentum

Since that article we have seen a big increase in planners @NxtGen_Progress following the US with this kind of charging structure for younger professionals and business owners.

Kitces approach is actually designed for a pure financial planning proposition, excluding investments, and he suggests a ‘blended’ approach might work where platforms and so forth start coming into the picture. But if you can’t see why planners would want to adopt more retainer type fee structures, you can see why customers might. As Kitces put it: ‘You just stop paying as soon as you don’t feel like you’re getting value any more.’

Have a very good week!

Will Robins, Editor, New Model Adviser