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Fad valorem: Can alternative charging structures work in wealth management?
by Elsa Buchanan on Aug 21, 2013 at 11:54
‘If you make 100% one year because you get lucky, you take your performance fee, but if you lose 100% the next year, does it mean you go bust?’ he asked.
Tier One Capital seeks to safeguard against managers taking on too much risk by building a ‘further layer of compliance’. It employs an independent compliance consultancy firm to oversee internal procedures.
‘A cynic would suggest the argument against performance fees is used by larger firms without the structures to implement them, but at the same time the larger firms will happily invest clients into hedge fund products with a performance fee element generally included,’ McElroy added.
Saunderson House also opted to move away from the industry norm with an hourly rate fee structure. This has been in place since 1995, with fees ranging from £100 to £524 per hour depending on managers’ seniority, rather than on assets under management.
Director Tony Wellby explained: ‘All we charge for is the time it takes to do the work. Our fees do not piggyback the rising value of portfolios and we can prove we were not motivated by commission.
‘It’s interesting that clients are struggling with the industry’s ad valorem standard. Our fees are both shown in sterling and percentage terms, because the majority of our clients are sophisticated. By charging them hourly, we mirror our clients [lawyers or accountants], who also charge their clients hourly,’ he said.
Private wealth director Jonathan Fry says wealth businesses should not be afraid to use models like those used by solicitors and accountants, where ‘non-contingent’ fees could be levied regardless of whether the client chooses an ongoing service.
His firm charges both contingent and non-contingent fees, depending which services are selected.
Any firm brave enough to try to be different could be left out in the cold as their competitors continue to favour contingent fees, Fry added. ‘You have got to be brave and a controlled soul to be totally non-contingent.’
Nonetheless, he says there could be long-term value in the alternative charging model.
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