Fee-Based vs Percentage-Based – Which Advice Fee Is Better?

Another day, another regulation change. This time, regulators and key industry leaders are calling for a change to move financial planning from an industry to a profession. Like other professions such as medical, law and accounting, people will usually pay on a per hour or per service basis. However, when it comes to financial planning, there is unrest in the industry regarding how advice should be charged.

With buzzwords such as “pay on demand" and “modular/episodic" advice, are we discussing advice fees in financial planning or are we discussing the next streaming subscription service?

There are many benefits with each approach to advice fees. The obvious benefits of fee-based advice include providing greater transparency for your clients by demonstrating that each service is itemised and your team doesn’t prioritise clients with higher balances. Given the unpredictability in advice processes, it is hard to determine how long advice will take to complete, therefore, fee-based advice makes sense as advice is charged based on the areas of advice clients receive.

Despite the pros associated with fee-based advice, John Walker from Optimal Wealth Solutions expresses his concerns for fee-based advice stating that fee-based fees be a barrier to entry for potential clients with low balances highlighting that, “dollar-based fees can make it extremely difficult for potential clients with low balances to get proper financial advice as the fee percentage can be extremely high". It’s safe to say that these people are the ones that are in need of advice.

For John, he believes that percentage-based fees provide incentive to provide quality advice to clients. He states, “we believe that a percentage-based approach aligns us more closely with the client in that we are rewarded for growing their wealth over time. For smaller balances, this doesn’t work so well so we look at a minimum dollar amount on a fee for service method".

“We work on an ongoing service basis which incentivises us to provide quality advice to our clients knowing that they are free to leave at any time. We find that most clients prefer this method and they realise that we are in it for the long term with them." – John Walker, Optimal Wealth

So what’s the verdict? How you charge comes down to a number of factors such as the type of clients you prefer servicing, whether you use technology to increase efficiencies in your practice and your desired service offerings. So long as you can justify your fees and provide transparency through every engagement with your client, both fee-based and percentage-based fees may a place in financial planning. The ultimate decision is up to the client and how they choose to pay.

Regardless of how you charge, efficiency in your advice process can increase your profit margin and further to this, no one enjoys generating repetitive advice documents. Whether it’s percentage-based or fixed-fee service, incorporating technology in your processes mean you may be able to service more clients in less time. In light of the focus on service and efficiency, we encourage you to sign up for your free trial of Asendium Lite and be amazed at how easy advice can be.

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