By Thomas Skinner
The traditional way in which financial advisers charge their clients is called ad valorem, or more colloquially, assets under management (AUM).
Typically, an adviser will charge a percentage of the assets they manage on behalf of their client. The greater the asset value, the greater the fee.
But a recent meeting with a new prospect made me realise just how this structure is failing both clients and advisers alike. Forget the money, focus on the service proposition and the value you can add.
When The AUM Doesn’t Match The Income
The client was a board member of a High Street brand and married to a board member of another High Street brand. They had a very high household income, a young family, and had recently refurbished their London home. They were primed and ready for a long term financial plan, the perfect clients, you might think.
“I don’t feel very loved, to be honest”, said the client of their current adviser. “I send an email and it takes months before I get a reply. I don’t think they’re very interested in me. And, I have no idea what I pay for their services.”
Together, we looked at the fee structure. I centred in on the issue.
I asked, “How much money do they manage for you?”
I was stunned. Their combined household income was more than the assets under management.
A New Charging Structure
“Okay,” I said, “Let’s leave that for a moment, tell me the plan.”
“Right,” said the client, “What we want to do is this…” and away they went.
Quickly we encountered some problems in the plan, conflicting spousal perspectives, plus a general cost-today-versus-future-benefit balancing act to be considered. It was classic financial planning stuff.
My proposal to the client was this: I will send you a note and outline a plan. I will charge a fee to design and implement that plan and on ongoing fee to execute the plan. We will still strip the adviser fee from your assets under management and I will charge you a monthly fee of £250 per month. If at any point you no longer feel the service of value, just cancel the ongoing fee.
I explained to the client that, currently, they were paying £1,000 per year via their investments of £200k. It is no great secret that the target client for their current firm was £1,000,000 under management. Under the AUM model, the client did not have enough capital invested to be a key individual to the firm and was being sidelined for more wealthy clients.
Targeting clients who only have assets you can manage ignores individuals who are willing to pay for your service in other ways. Why would you try and make the client fit the fee model? Instead, make the fee model fit the client and the services they are willing to pay for. AUM is an outdated model that may suit the boomer generation but not younger clients (Gen X, Gen Y), who, with the decline of final salary pensions, have much more complex planning requirements.
You Get What You Pay For – Or Do You?
After I explained all this, the client replied, “To be honest, I am happy to pay a few hundred quid a month if I am getting value in return. I want to pay bottom dollar, obviously, but if it gives me what I want, I am happy. I understand you get what you pay for.”
The client is happy to pay £3000 per year for a good service. What they were getting was a bad service for £1000, hidden in charges they did not understand. Their current firm was so disconnected from the current market and needs of their younger clients that they had missed this.
By offering a planning service that with rigid fee models and a focus on assets under management, the firm is forcing itself to concentrate on a certain segment of society.
It’s much easier to explain the benefits of a planning service to someone aged 40 compared to 70, usually. With the younger clients, there is so much more work to be done and value to add.
Would you rather have a 70-year-old or 40-year-old who paid the same fees?
What this client highlighted to me was that it matters less how the client pays. What matters more is what the client pays, whether via income or capital and, most importantly, what they receive in return.
Be pragmatic and say to clients, “That’s my fee, that’s what I can do for you and you ever feel we are not delivering, cancel the fee. Do you want to pay via your income, capital, or a mixture of both?”
A firm that had focused on its service proposition first and then, at the end of a client focused planning session, allowed the client to choose how to pay, would not have lost the client.
We were delighted to be appointed and to work with them and hope we live up to their expectations for many years to come.
Tom is a founder, Financial Planner, and the Managing Director of Barnaby Cecil. He is married with two boys, Otto Barnaby and Charlie Cecil. His focus is to understand the psychological aspects of finance and link this to a meaningful and fulfilling outcome. An avid reader, his planning principles have been heavily influenced by the works of Kahneman, Taleb and Bogle. This approach helps him understand human behaviour and how this translates into solutions that allow his clients to maximise the utility of their wealth. He works closely with Emma Walker to develop bespoke and innovative financial plans.