Nutmeg faces a financial advice industry reluctant to shift away from ad valorem charging models as it argues its new flat fee structure investment advice offering will help tackle the advice gap.
The robo-adviser is offering investors a free 15-minute consultation with the option to receive tailored recommendations, including fund picks, for a flat £350 fee. In contrast, most financial advisers charge investors for a percentage of assets under management, including money being outsourced to a discretionary investment manager.
In announcing the launch, Nutmeg said it was looking for a way to make advice more affordable and accessible, noting fewer than one in 10 people in the UK use a financial adviser.
CWC research managing director Clive Waller says it will be difficult for advisers to charge large fees for “a bit of advice a computer can do for pennies”. However, others in the industry argued robo-advisers will fail to shift financial advisers’ charging model.
Flat fees better suit wealthy clients
The shift from percentage fees to flat fees would have started already if it had any legs, says Tom Kean, director at Thameside Financial Planning. “I don’t think for one minute this will drive anyone down the road of flat fees.”
Kean adds: “Both have their advantages and disadvantages, and both are still equally open to abuse by the wrong person.”
Flat fees disproportionately affect investors with modest portfolios, while investors with larger portfolios are getting their advice more cheaply, according to Bella Caridade-Ferreira, CEO at Fundscape.
“Of course, the opposite is true if you’re charging percentage fees, but fees can always be capped so that wealthy investors do not pay over the odds,” Caridade-Ferreira says.
An adviser’s work on investible assets is much more than selecting investments and the role involves conducting the fact find, doing the financial, tax and estate planning, she says.
Technology will change advice
However, Justin King, chartered wealth manager and financial planner at MFP Wealth Management, argues Nutmeg’s approach will drive advisers to charge for the planning separately from the advising on assets.
Waller says there is more argument for flat fees in financial planning and that flat fees will become more common across the piece.
He says: “Advisers do not live in a vacuum. Technology and demographics will change the nature of advice. Clever people with clever technology and large resources will see how to make money from giving advice at a sensible fixed price.”
A mix of fee structures makes sense
Meanwhile, Mark Polson, founder of the Lang Cat says there is a disconnect between fee structures and some financial planning activities.
Polson says: “It doesn’t cost more to prepare a plan for someone with a £200k Sipp than a £100K Sipp: as the old saying goes, it’s what you do with it that counts. Planners are careful to ensure that the client doesn’t believe they are magic investment gurus; as a result there is probably a case for breaking the link here.
“However, administration, risk and investment costs do rise with asset size, and so there is probably more of a case there for continuing with percentage-based charging.
“I suspect over time most firms will move to a mix.”
Regulatory pressure on advice fees
Mifid II could be another catalyst that could drive the industry towards flat fee structures, says Gillian Hepburn (pictured), director at Discus.
More disclosure might result in clients questioning the value that their advisers are delivering, “particularly if advisers are not confident about articulating the value they add”, says Hepburn.
“In relation to outsourcing investment it’s not relevant how they charge (percentage or a flat fee) but the challenge might be around explaining the total cost to their client of advice and investment.
“Advisers need to clearly articulate the services that they deliver to the client particularly when they are not managing the client’s investments. This has been a challenge for advisers since the introduction of the RDR where they had to start charging a fee for services being delivered.”
Flat fees on platforms
Meanwhile, last month, Alliance Trust sold its platform business to rival fixed fee provide Interactive Investor.
Polson says there is no shortage of direct platforms with a stockbroking heritage who will offer activity-based or flat fee structures.
But on the advised side, it’s just Alliance Trust Savings.
“I think the two markets work quite independently of one another, but the intellectual case for flat fees on platforms remains as interesting as ever it was.”
