Flat fee advice model ‘rubbish’
New Zealand shouldn't follow Australia by pushing financial advisers into charging flat fees for advice, say critics defending the model of charging based on clients' asset size.
Thursday, June 14th 2012, 7:26AM
by Niko Kloeten
The assets under management modelrecently came under fire from the Australian Financial Review's Asset magazine editor LengYeow, who said, "There's no reason why an industry, which claims to have successfully transitioned to fees, charges for ongoing advice based on a client's underlying pool of assets."
Australia's new FOFA (future of financial advice) regulations ban "conflicted" remuneration structures including commissions on the distribution of retail investment products, and restrict where assets under management fees can be charged.
But Auckland investment adviser Grant Cleary said the flat fee model favoured by the Australian regulators is "rubbish" and "nobody does that anywhere in the world".
Charging based on assets under management is a "win-win" model for both the investor and the asset manager, he said.
"What the clients want is more personalised service and more time spent on them... if you are dealing with large clients you might only have 15 to 20 clients but because of the fees you are charging these people can get excellent service."
A client with a $20 million portfolio requires more work than someone with a $1 million portfolio, who in turn requires more work than someone with only $100,000 to manage, Cleary said.
"All clients deserve to be treated fairly but not all of them deserve to be treated equally."
According to Russell Hutchinson of Chatswood Financial Consulting, there is another justification for charging based on assets: risk.
The wealthier the client, the higher the risk that is involved with managing their money and this applies to the insurance sector as well, he said.
"With people that have more than $1 million of life insurance cover the insurers underwrite them harder, they are more likely to be the subject of murder or suicide, and they tend to be more demanding clients."
Niko Kloeten can be contacted at email@example.com
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