Regulator are, of course, reluctant to intervene to cap fees charged by advisers except when exorbitant fees are charged by scammers with the deliberate aim of cheating investors. This does not mean, of course, that the FCA does not keep a close eye on fees and it has certainly set out to reform fee structures in the asset management world, as it made clear in its Asset Management Review.
So what is a fair fee to charge a client? This is, inevitably, a difficult issue but there seem to be two main camps.
On one side, the hourly or set fee lobby. These Financial Planners argue that in order to be a true profession Financial Planners should charged hourly fees for the amount of work done in the same way that lawyers and architects do.
In theory, this sounds simple and effective and there is much to support it. Clients know exactly what they will pay (as long as fees are clear and set out in advance). This also removes most bias except perhaps the desire to extend the length of work to maximise fees. As anyone who has worked with lawyers, architects and other hourly-paid professionals will know, fees are negotiable, of course. Not every client realises this and I suspect many more naive clients working with professionals will pay over the odds because they are not good negotiators.
So fees are a good way to charge clients but not perfect and I've often quoted the fact that the Solicitors Compensation Fund pays out millions each year because solicitors cheat clients or run off with the money from a property sale.
For example, the Solicitors Regulation Authority Compensation Fund paid out over £23.8 million in the year to 31 October 2014. During the year the fund received 1,701 claims and the average claim paid out was £80,000.
So hourly fees will suit many clients, perhaps most, but they do not guarantee a perfect solution every time and they can be expensive, severely limiting the number of consumers able to access Financial Planning.
In the other camp, and increasingly popular among Financial Planners, particularly those more investment-focused, is the principle of charging a set percentage of assets to manage funds, subject to certain minima. This fee might be 1 or 2% per annum of a £100,000 or bigger portfolio.
This is an approach favoured by many wealth managers and has its merits. Clients handover much of the headache and paperwork in managing a portfolio to a Financial Planner or wealth manager who, in turn, may use a DFM or CIP and will manage all aspects of the investment, often via a platform-style service.
For those clients who want to take the hassle out of managing money this works well. There is an understanding from clients that managing money takes time and effort and passing on this role to a trusted third party makes sense. Again this is not a perfect approach. If a portfolio under-performs the percentage fee is still charged, eroding the portfolio further. There are also risks of investment churning, clients being unaware of the all the earnings a planner may receive from a portfolio and simply poor management. There's no guarantee of investment success which is often what clients seek, even if they won't admit it.
The main issue in the debate is that both sides fail to agree on what is right for the client. From a fiduciary point of view hourly fees would appear to be the best option. From a cost point of view a percentage fee could be lower in cost overall and perhaps fairer.
I've had many conversations with Financial Planners and Paraplanners on these issues and I have wrestled with them too. Overall I have concluded that unless the FCA or professional bodies intervene, there really isn't a right or wrong answer and no perfect answer. It simply isn't realistic to say one is better than the other.
What is evident is that conversations with clients over fees and fee options probably need to be much more extensive and longer so clients better understand the fees being charged and what's best for them. Inevitably clients will want to pay the lowest fees for the maximum service but I do believe most clients fully understand that their professional adviser needs to be paid fairly and this is the best way for a long term relationship to work for both sides.
It may be that for some advice or some specific work an hourly or set fee would work best. If the client has a much bigger portfolio and just wants it managed effectively with minimum holistic advice I can't see why a fair percentage fee cannot be charged if that's what the client wants and is happy with. It could, of course, be argued that this is investment management and not Financial Planning but it's hard to imagine a scenario where good Financial Planning advice would not be beneficial to the client as well.
The debate so far has been mainly contained within the Financial Planning sector but it may be time to open it up to clients. Ultimately a client happy with the charges they are paying and getting good service as a result is more likely to be a long term client and to recommend their planner and that's in every planners' interest.
Kevin O’Donnell is editor of Financial Planning Today and a financial journalist with over 20 years of experience