Under its new ‘pay for performance’ structure the planner’s fee is based on how well a client’s investments perform over time, and is calculated as a percentage of the actual return. If the portfolio does well, both client and planner share in the benefits. If it does badly, the planner reduces their fee accordingly.
Guardian Trust Financial Services national sales and marketing manager Tony Kinzett says the new performance-related financial planning fee could shake up the industry.
“In a low-return environment, the spotlight has inevitably fallen on the fees financial planners charge for ongoing services,” he says.
Kinzett says the new structure is based on customer feedback and is a new approach to an old problem.
“No matter how good or bad the return, it seems the planner always gets their fee.”
Currently Guardian Trust’s standard financial planning annual fee starts at 1.2% annually and reduces for higher value portfolios.
Under the performance structure clients pay a base fee of 0.5% annually, plus 10% of the actual return.
Kinzett says if a client’s portfolio returns 5%, that person would, under pay for performance, be charged the base fee of 0.5% plus a further 0.5% (10% of the portfolio return of 5%), making a total annual fee of 1%, compared to the normal 1.2%.
If returns are negative the client will be charged the base fee of 0.5%, but that’s all they will pay.
Conversely, a high return means a client will pay a little more, but the clients who choose such an approach are quite happy to share the gain, Kinzett says. Kinzett says clients have the option of picking which fee structure they use, and he acknowledges pay for performance won’t suit all Guardian Trust’s clients.
“We see business coming from two quite different types of investor - those with a strong focus on fees and costs, who tend to be more conservative, and at the opposite end there’s the growth-focused ones who like the focus on performance.”
Kinzett says the traditional approach will continue to be dominant for a long time to come. “Nevertheless, for those who want to share both the rewards and the risks with the planner, but had no choice until now, pay for performance is an exciting new innovation.”
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