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Forward Thinking Magazine : April 2011
44 What are my choices? Advisers have three main choices when it comes to choosing a pricing model: asset-based fees, fixed-dollar fees and hourly rates. Here, we look at the benefits and limitations of each approach. Under an asset-based fee model, advisers charge fees as a percentage of the client’s assets under management (AUM) (as opposed to funds under advice, which in some clients’ cases is a separate thing). “Clients are often open to this type of pricing as it doesn’t initially appear as expensive as a dollar fee and the fees can be readily deducted from funds under management,” says Liz McCarthy, Head of Macquarie Practice Consulting. “Some clients also prefer this system as the planner’s remuneration rises and falls with the value of their investments. It means too that as markets rise over time, the fee to the planner should rise as well. The planner’s revenue also reflects the higher risk involved in advising on a larger AUM,” McCarthy says. But advisers who use this model also need to be aware their income will drop if markets fall and as retired clients draw down their capital – but their workload is unlikely to reduce in the same way. Indeed, there is no real link between the work performed and the amount of the fee. For instance, under this structure, planners are often not remunerated for advising on other assets such as direct shares. In addition, a flat percentage fee applied to very large portfolios can result in fees that are too high or unreasonable. But when applied to a small portfolio, such as accumulator clients with smaller AUMs for example, this structure can mean clients are unprofitable to service. This fee model also attracts criticism as being ‘commission by another name’. Another popular fee model is the fixed-dollar fee. This can be a set fee per annum or a scaled matrix where fees go up according to the size or complexity of the client’s portfolio. Rosemary Salway, Beyond Wealth