Over recent months, it appears to me that the “default” AUM adviser charging (and for that matter investment management and platform charging) model is under threat. And I don’t just mean from the FCA, though clearly their focus on this method of charging does bring the issue front and centre. In the more transparent post RDR world how sustainable are AUM based charges?
It is highly probable that over time AUM charges will be squeezed and in some cases openly challenged. Here are some questions that might be worth reflecting on.
Where is the justification for an AUM based charge for using a platform? Where are the additional costs to the platform provider for having, say, £1m of a client’s assets on the platform compared to £500k?
Likewise, is an AUM charge really justifiable for managing the money? I’m not saying it isn’t, I’d just like to understand the rational arguments for charging in this way. Would a percentage of the growth in value be better from the client’s perspective, maybe with additional out-performance based charges and of course, under-performance rebates? That would bring a whole new dynamic to the fore.
Is it likely that the AUM approach to adviser charging will become increasingly difficult to defend? Why should a client with £1m pay twice as much as someone with £500k for an ongoing service that is, in most respects, the same? The public aren’t stupid. They’ll work that out sooner or later, now that things are more transparent.
Would a “flat fee for service” approach, based on the level of service provided, rather than the level of assets, make more sense to clients, other professionals and the regulator. Our experience suggests that those IFAs that have gone this route have been able to use it as a great differentiator with accountants and solicitors. They love it! And so do their clients.
What would be the benefits and drawbacks of such an approach to your business?