The trend in advisory business is towards charging a fee as increasingly more IFAs are adopting a fee based approach. However, as many advisors are discovering, introducing such a major change is sure to meet some resistance from clients. This transition is not easy for clients as well as the advisors. Moreover, financial advisors may feel they have a competitive disadvantage as many of their peers may not be charging fees.
In such a scenario you need to adopt a fee structure which is competitive and at the same time compensates for your services well.
The selection of the best fee model largely depends on the client-advisor relationship and the business model of the advisor. Nisreen Mamaji of Moneyworks Financial Advisers says, “Though there are different fee models followed in India, charging fee mainly depends on the financial advisors relationship with the clients.”
Let’s look at some of these fee structures in detail.
Type of fees
Profit sharing - Financial advisors can charge clients on the basis of profits generated by the portfolio. This model is best suited if you are advising direct equity.
Pros:
- Clients prefer this model as it ensures that they will be charged only if the portfolio gains
- Relevant if the major part of the portfolio consists of equity
Cons:
- Uncertainty of income as it depends on the performance of the market.
- It would be difficult to fix a performance criteria based on which you would claim profits if the performance of the market is average.
- Charging percentage of profit can be a challenge
Rohini Raina of Cogent Affiliate Network says, “This model does well only if markets perform better. Moreover, while an IFA can charge a higher percentage of profits in equities, the same cannot be applied for fixed income.”
Fixed fee – Advisors charge a fixed amount of fee annually for the services offered by them. Deepali Sen of Srujan Financial Advisors says, “Clients are charged on the basis of their portfolio. On an average, clients with simple portfolio are charged anywhere between Rs. 25,000 to Rs. 30,000 while clients with complex portfolio are charged up to Rs.75, 000.”
Pros:
- Fixed revenue for the financial advisor irrespective of the market condition.
- More transparent as the amount is decided upfront mutually
Cons:
- It can be difficult for financial advisors to re-negotiate fees.
- Revenue is not in sync with the efforts of the advisors. It excludes any value add services which an advisor may have introduced for the client.
Transaction based fee – Financial advisors can charge an amount or a percentage of the transaction value for every transaction executed by them.
Pros:
- Ensures transparency. Clients are comfortable to pay fees as they are aware of the actual transaction value.
- Assured income for the financial advisors depending on the number of transactions.
Cons:
- Since each transaction is charged clients may feel that an advisor is initiating transactions just to earn fee.
- Clients may be unwilling to pay a percentage fee on high value transactions
- This model excludes fees on value add services provided by advisors
Vishal Dhawan of Plan Ahead Wealth Advisors says “The disadvantage of this model is that clients may be reluctant to pay fees for any other services apart from the transaction fee.”
AUM based fee: Financial advisors can also charge clients on the basis of their assets under advisory (AUA). The fee charged is usually 1 to 1.5% of the AUA.
Pros:
- As the portfolio increases the fee also increases.
- This method is easy to calculate and understand.
Cons:
- Difficult to ascertain the amount upfront as it depends on the performance of the market.
- In case the portfolio gains substantially some clients may be reluctant to shell out a high fee.
There is no standard rule on how you can charge your clients. Generally, financial advisors follow a hybrid model which could be a combination of any of the above models, depending on the services offered by them.
Let us know your thoughts.
