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Fad valorem: Can alternative charging structures work in wealth management?
by Elsa Buchanan on Aug 21, 2013 at 11:54
As the retail distribution review (RDR) brings greater transparency on charges, is it time to review your charging structure?
Applying a percentage charge to the total assets under management, known as the ad valorem model, is currently the dominant charging structure in wealth management. However, a recent Financial Conduct Authority (FCA) review of the impact of the RDR found consumers struggled to understand the concept.
New boutique Tier One Capital has questioned the validity of charging ‘sizeable’ minimum fees even when markets tumble. As a result, it has implemented a performance fee structure after market research with potential clients found a majority were strongly in favour.
The firm charges a flat fee of 0.5% per annum, with an additional performance fee subject to specific agreed targets being hit: 15% of any performance over 6% per annum; 20% above 8%; and 25% over 10%.
Managing director Ian McElroy said: ‘The common frustration from our sample [of clients] was of the ongoing payment of significant fees, irrespective of the portfolio movement being positive or negative.’
He added: ‘It doesn’t go unnoticed by clients that this works more in favour of their adviser’s pocket than the returns of their portfolio.’
Eric Barnett, chief executive at Société Générale Private Banking Hambros, believes ad valorem is valid as long as managers are ‘upfront and transparent’ and the fees ‘predictable and consistent’.
However, he says transparency has caused some clients to question how much they are paying, adding that peers have started to see movements from advisory to execution-only.
The private bank generally charges fees on an ad valorem basis apart from certain specialist areas, such as trust business, where hourly fees are applied.
Although Barnett acknowledges there is scope for alternative charging structures, he is opposed to performance-related fees which he says can ‘distort’ perceived risk and balance sheets.
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