Charles Schwab sets roadmap for shift away from ad valorem charges

Netflix-style fees across the Atlantic could translate for UK intermediaries

A Netflix-style subscription fee introduced by US giant Charles Schwab in March could provide a roadmap for UK intermediaries to leave behind ad valorem fees.

Last week, the US retail investment giant revealed it was launching a premium service, Schwab Intelligent Portfolios Premium, for clients with more than $25,000 with a $30 monthly subscription plus an initial one-off charge of $300 for planning.

Unlike the previous 0.28% advisory fee, the subscription rate does not rise for higher asset levels.

A Charles Schwab spokeswoman told Portfolio Adviser in an email that the subscription fees are most cost-effective for portfolios larger than $125,000 and that clients with smaller amounts could still use the ad valorem fee to access its ETF portfolios in its existing Schwab Intelligent Portfolios, albeit without 24-hour access to a certified financial planner.

The premium service also includes a “comprehensive financial plan” and “interactive online planning tools”.

A Netflix fee model

Charles Schwab said it introduced the subscription model because clients can relate it to other services they use, like the gym or television and movie streaming services, such as Netflix.

The fee model was constructed in response to client feedback, said the firm’s vice president for digital advice and innovation Cynthia Loh in a press release. “Cost and complexity are two of the biggest roadblocks to accessing financial planning, and our goal is to break down those barriers.”

Loh added: “Subscription-based pricing is second nature to many of us who pay this way for other forms of ongoing access and guidance – from streaming media services to fitness and personal training memberships. We think people should have the opportunity to pay for financial planning the same way.”

Lang Cat director Mike Barrett says he “would love to see someone like this come into the UK and offer that type of model” stating the flat fees are better for the end client. “Particularly if you are saving for the long term, the costs are being controlled much more in the clients’ favour.

A route away from ad valorem

A subscription model would be a good way for a UK adviser to switch ad valorem fees for flat fees, according to GBI2 director Graham Bentley.

A £30-a-month subscription would equate to a 1% annual fee on £36,000, Bentley points out. “The typical £100,000 client would need to pay £83 per month to reward the adviser at the rate they’re paid now, and with no growth element.

“If they’re brave enough to go to fixed fee versus ad valorem, that would definitely be the way to introduce it.”

Hargreaves Lansdown or Quilter are the candidates he thinks would be most likely to offer such a service as a stage below “full-service” advice. “I suspect some businesses will find the whole idea a bit ‘tacky’, but then they’re probably still charging in guineas.”

Hargreaves currently charges a percentage fee of 1 to 2% for initial advice depending on portfolio size and whether clients are seeking investment advice or complex financial planning. That is subject to a minimum charge of £495 for telephone advice or £1,495 for face-to-face advice. Ongoing advice is charged at 0.365%.

Quilter Private Client Advisers charges between 1 to 3% for initial advice depending on portfolio size, albeit with some services, such as cashflow planning or inheritance tax, facing fixed fees starting at around £1,500. Ongoing advice is 1% of assets.

UK banks could be candidates for fee revamp

Charles Schwab offers limited services to UK customers and the subscription fee is not available on this side of the Atlantic.

In the UK, high street banks, like Santander or the Schroders Personal Wealth tie-up with Lloyds bank, might be the most likely businesses to consider the Netflix-style fee, says Fundscape editorial director Gavin Fielding.

The advice industry likes percentage-based fees because “it’s not like the client is vividly handing over hard earned cash”, Fielding says. “Fee-based charges are the opposite but seem to work for Netflix with a monthly subscription that we set up and then forget about.”

A Schroders spokesperson said it was too early to comment on details around fees given its wealth management joint venture with Lloyds will not be launching until summer.

Portfolio Adviser has reached out to Santander for comment.

Interactive Investor could be another contender to introduce subscription-style fees due to its existing flat fee structure, says Fielding.

On Tuesday, the D2C platform published research regarding percentage-based fees finding only half of UK adults could correctly work out that 0.5% of £50,000 would amount to £250 in the first year. Two in five thought it was too expensive for custody and administration investment fees, while a further 34% of respondents were unsure if it was value for money.

II chief commercial officer Alex Kovach says he welcomes Charles Schwab’s move. “Their logic follows much of our own thinking when it comes to flat fees – the financial services sector still clings to percentage fees and fresh thinking and innovation is long overdue.” The platform is planning to launch an advice service in 2019 following its acquisition of Alliance Trust Savings.

RDR could make replication difficult

While Barrett welcomes Charles Schwab’s simplified fee structure, he reckons it would be unusual for a UK provider to cut their pricing as dramatically as the investment giant.

He says: “Part of the reason they can afford to cut their pricing that dramatically is that they also make money from the holdings their investors have in cash. They’re also cross subsidising from their own in-house funds. They’re very much a vertically integrated model with a lot of revenue that is quite hidden from the end investor.

“The way RDR rules in particular for advised businesses is set out at the moment mean that model is difficult to directly replicate in the UK.”

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