Regulatory pressures are causing more advice firms to consider a value based subscription fee structure, according to Alan Smith, founder of Capital Asset Management.
Speaking to FT Adviser, Smith discussed how his firm transitioned to this fee structure eight years ago, moving away from the traditional percentage of assets model, and why an increasing number of advisers are keen to do the same.
He said: “We recognised as a firm the most value we deliver is in the planning, project management and taking the client from where they are today to where they want to get to, as opposed to pure investment management.
“And if that’s the case then we thought charging a percentage of assets on the clients' retail investment funds seemed questionable.”
Smith said his firm began to explore other fee structures and spoke with a number of clients who were beginning to question the current fee model.
“We recognised a significant market that we could plug into. There are a lot of people in the UK who would love to receive financial planning but they don’t have thousands of pounds of investments and these people include business owners who have their wealth tied up in their business.
“As well as younger clients who would like to create a plan but have relatively modest amounts accumulated. We saw all of this as an opportunity to improve our pricing model.”
Smith said the impact was generally positive from clients when Capital moved over to its subscription based model but highlighted the firm needed to really articulate clearly and demonstrate to clients how the change would affect them.
He said: “One of the challenges we had was the ability to articulate to our clients what the change would mean for them, so we used data and numbers and broke down what we determined was wrong with the percentage charging model.”
Problems with percentage charging model
Smith outlined four key challenges with the percentage charging model which he described as the “four C’s”.
These were conflict of interest, contingent charging, cross subsidy and the compounding of costs.
Smith said: “My belief is if this model hadn’t been invented, nobody would invent it now because it makes no sense to clients.”
However, Smith said regardless of the challenges above, advisers stick to the percentage model because it is “easier”.
“One of the reasons people cling onto this dated model is because markets go up three out of four years on average but every now and again they fall which causes firms to have to let go staff because the income no longer is sufficient to cover their costs.
“So to run a business where you have no control of your future income stream to me is not wise,” he added.
