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High net worths may favour performance-related fees but should you?

by Elsa Buchanan on Dec 04, 2013 at 09:32

High net worths may favour performance-related fees but should you?

The retail distribution review (RDR) has brought a notable shift away from annual fees towards payment based on transactions or time spent, for example on an hourly basis.

Research by Ledbury has found almost one in 10 high net worth clients now pay for advice on a time spent basis but pointed to a desire among many to link fees to performance and profit generated.

Despite this being a less mainstream – and potentially more volatile and less lucrative – approach, is it an option wealth managers are considering?

Boutique Tier One Capital introduced a performance fee after market research found most potential clients were strongly in favour. It says wealth managers should question the validity of charging ‘sizeable’ minimum fees when markets tumble.

Partner and Wealth Manager cover star Stephen Black (pictured with co-founder Ian McElroy) said: ‘We regularly received feedback from clients that it frustrated them there was no meaningful accountability for poor performance in the wealth management industry. Full fees would be levied regardless of whether performance was good, bad or indifferent.’

He said performance-related fees are linked to his confidence that the company can ‘more regularly make correct investment decisions than bad ones’. But he acknowledged clients often question when the performance fee kicks in, its size and what the downside scenario is.

While the boutique charges a flat fee of 0.5% per annum, it offers 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%.

This is alongside a range of fee options, including performance-based fees, traditional fee structures and fixed fee retainers. ‘This choice is important as it ensure we can provide the type of fee approach clients prefer and see value in,’ Black added.

Manchester-based stockbroker Pilling & Co has also previously agreed to trial performance-related fees with a single client.

Wealth manager Alistair Hodgson said he dropped the charges after the client changed his mind ‘because I made a lot of money on good performance’.

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