Ad Valorem – latin – ‘according to the value’

Just read two more articles on adviser fee models. There’s something in the financial press almost every day now and yet, the majority of advice firms have not changed their fee model and anecdotally, many have no intention of doing so. And quite right. Just because journalists and market commentators get their teeth into something, doesn’t mean we all have to take action. As for clients, up to now, they’ve done what their adviser has told them to do, almost without question. Yes, we have far more access to information these days, but it’s often overwhelming and we still want someone we trust to interpret for us.

But what if there was a competitive advantage to be had. Would it be worth making a change if it meant significant revenue growth? Let me explain. There’s another, related, theme emerging right now. A significant number of investment managers (DFMs if you like), have either launched, or are working on, financial planning propositions. Some have had this capability for years and don’t appear to arouse suspicion amongst advice firms who ask them to manage client money, others are new to this and are in the process of ruffling a few feathers. Then we have a bank and an old investment house doing something at scale. You get the idea.

Why are they doing this? Well, it looks defensive. Hard disclosure raises questions for clients and when you couple that with column inches devoted to fees, it’s perhaps not difficult to understand why some early proponents of flat fees are having a good Q1. If you’re on the board of a DFM firm, increased outflows are a worry and the resulting discussion could even cause lunch to be delayed. And it seems the result of all this extra attention, is to throw in a cashflow forecast and call it financial planning. Keep the price the same and add more value. Is that the same proposition as a true financial planner? No. Can the client tell the difference? Probably not. Oh and trust…

While most advice firm owners will publicly declare that they don’t care about these developments (‘they won’t be taking my clients’ etc), they may be missing the point. If a firm just wants to stand still, then fine, but there is a distinct opportunity for financial planning firms to grow and a move away from ad valorem pricing could well be the key. A DFM firm will never offer a fixed or flat fee. It crosses so many boundaries and fundamentally changes their proposition; money first, planning second.

A true financial planning firm struggles with ad valorem. You’ve only got to have a conversation with a client about wealth transfer, to know the business model is diametrically opposed to the notion of capital preservation and tax minimisation. Not saying anyone is doing wrong, but it feels wrong in many situations. A move to fixed or flat fees takes the issue away and puts the adviser firmly on the same side of the table as the client. It also clearly distinguishes the firm from all the other ‘financial planners’ who appear to be offering the same thing.

In summary, ditch ad valorem, point out the clear difference between your financial planning proposition and the rest of the market and the advantage for the client, embarrass the competition, lock in 20% revenue growth for the year and dig out your black tie for the awards season. Well, if only it were that easy. It’s probably something to think about though.

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