Trail commission. Is it the silver bullet that enables Financial Brokers to be paid for the value they add, to build value in their businesses and eventually sell the business at a healthy multiple? Or is it a somewhat opaque way for advisers to be paid, sometimes with very tenuous links between the value provided by the adviser and the payment received?
Trail commission is far and away the most popular method of ongoing fee collection today. First of all it’s relatively easily explained. Clients understand it. And of course trail is very easily collected. Clients don’t have to write another cheque, which is always a potential hurdle. Clients also see a level of alignment of interest – if the portfolio sees strong growth, both the client and the adviser win. Also there is no VAT payable on trail commission, that will apply to retainers and fees if the adviser’s fee based turnover threshold for VAT of €37,500 is exceeded. This is good news for personal clients.
For the adviser, trail makes a lot of sense. It’s the most used factor in advice firm value calculations and trail tends to naturally increase each year in line with portfolio growth, and as new contributions are paid into investments and pension policies. Very importantly too, it doesn’t tend to dominate review meeting conversations. Many advisers have moved to Modular AUM-based Pricing, which is where prices are linked to AUM, but then varied based on the level of service. This has become very popular in Ireland, as the focus of the conversation shifts from the price paid to the value added.
But trail is not perfect. As we see asset management fees fall dramatically in some markets (note Fidelity’s recent announcement of zero charge funds – yes, you read it right!), trail levels will come under a lot more scrutiny. In any case, some advisers (and/or their clients) already baulk at the idea of their remuneration being based on the client’s asset levels rather than the value provided. This might be where fees come in.
How do you structure a fee?
I am often asked this question by advisers who have decided to go down the fees route, usually just for a segment of their clients, but on occasion for their business as a whole.
There are of course many different ways of structuring fees – below are listed some of the most common structures used in Ireland and/or in other markets. Of course each of them has their merits and drawbacks, but hopefully this list will help you identify one or more structures that suit you and your business. First of all, the most common structures are,
- A fixed rate for each service (plan preparation, annual review service etc.). These rates can differ for different levels of complexity associated with different clients.
- The “McDonalds Menu” approach of bundling services together into service packages, and then charging different fixed fee levels for different service packages.
- A monthly retainer
Some advisers are now combining one or more of these, including combining them with trail commission. The most often used combination is a fixed fee for preparation of a financial plan alongside modular based trail commission or a retainer for ongoing services.
Other less often used structures include,
- Hourly charging – rates are quoted by lots of advisers here, but few actually end up using this basis…
- A model used by advisers in some markets aimed at millennials and others with low asset levels but often high incomes, is advice fees linked to the client’s income and net worth, instead of to AUM.
- A subscription model based on client preference and personality. A client who is a “delegator” pays more than a client who is simply looking for validation of their own decisions, who in turn pays more than a DIY client who simply wants help with product execution.
As you can see, there are many different bases that can be used, and often the preferred structure is a combination of different structures. The challenge for you is to identify the model that fits best with your own client proposition and that reflects the value that you are adding.