If percentage fees based on the amount clients invest were to become a less common way of charging, Baade says this would most likely reduce interest from private equity firms.
“If you charge some form of fixed fee or an hourly rate, your revenue will not go up unless you have more clients or more advisers,” he says. “The revenue of an advice firm is basically flat.”
Louise Jeffreys, managing director of business broker Gunner & Co, says that if the approach to financial planning fees were to evolve to a more transactional approach, then the attractiveness to private equity buyers, as well as the overall valuations of businesses, would be negatively affected.
“If valuations reduced significantly, this in turn would likely change sellers’ motivation, and rather than consolidation we may find owners hanging onto businesses longer, or going for lower risk, internal succession plans,” she adds.
But Baade also says the financial advice industry could become more attractive to other types of investors, such as family offices. “[They] often just look for very predictable revenue streams because in a downturn, that also means revenue stays very flat.”
Percentage fees a draw for private equity investors
Jeffreys agrees that the link between financial planning fees and the size of an overall investment, rather than a time-based approach to charging for example, adds to the attractiveness of the financial advice market for investors.
“Return on investment is the key metric for these investors, and recent history has shown planners’ advice fees have consistently grown; not simply due to positive market movement, but also the propensity for existing clients to add more money, often into existing investment plans.
“Whilst there is risk from market downturns, that risk can be mitigated by the nature of (often) regular additional funds being added by clients.
“Furthermore, the nature of the proportionate fee means that income is received automatically and in perpetuity, rather than transactionally based on events which may or may not happen.”
But Freddie Athill, investment director at Cabot Square Capital, whose portfolio includes MKC Wealth and Moneyfarm, says he would stress that the fundamental dynamics of the industry are the reasons for investing, and not the charging structure.
“Of course, any other charging structure would also be designed to fairly compensate for the service provided.
“Returns are driven by creating good client propositions which they value and are happy to pay for, as well as efficient and high-quality operating platforms, and as such the exact fee mechanism is less important.
“Simplicity and transparency of fees are critical and you can achieve that with different mechanisms, which each have their own pros and cons.”
