‘Unprecedented shift’ in fee models used by financial advice firms

There has been an “unprecedented shift” in the variety of fee models used by financial advice firms, a new report from NextWealth suggests.

Percentage of assets remains the most common charging structure, used by 71% of respondents’ firms.

The study shows that while this charging model continues to dominate, its use is in decline – with popularity of all other charging structures rising.

Of “particular interest” is the marked rise in the use of subscription fees, which are used by 22% of financial advice firms all or most of the time, up from just 1% in 2023.

A growing number of firms are experimenting with alternative models, the report shows.

The cost of advice

The report also reveals the average basis point fee paid by clients for ongoing advice, funds, platform and portfolio management.

The total client cost increased in the past year from 1.75% to 1.89%, as estimated by financial advice professionals who participated in the survey.

Platform fees remain consistent and both funds and portfolio management are slowly trending down.

The average cost of ongoing advice is 77 bps, up 13 bps from 2023, and remains the largest share of total client costs.

Platform fees represent the smallest share at 27 bps – broadly consistent with the previous three years.

NextWealth data show that ongoing fees are fairly consistent across various firm sizes.

However, product charges tend to be higher in large firms.

Clients of financial advice firms with more than 10 advisers are paying 68 bps for funds, compared to an average of 43 bps.

NextWealth said it believes this difference is down to a higher allocation to active rather than a more expensive like-for-like product.

Initial fees

The proportion of respondents citing that they charge an initial advice fee decreased slightly by 6% compared with last year.

The big change is in the proportion that aren’t charging an initial fee, up two-fold to 23%.

Respondents from larger firms with over six financial advice professionals are more likely not to charge an initial fee.

Over half of these respondents say they do not charge an initial advice fee.

Among those that charge an initial advice fee, the average is £1,995 up from £1,800 last year.

The report revealed that the average portfolio size of clients in 2024 is £369,689.

In fact, 79% of respondents said that that clients are required to have £100,000 or more to be a client.

NextWealth said this shows an interesting dynamic – regulation is pushing financial advice professionals to provide more value for their clients but according to a significant proportion of respondents, this isn’t viable for those with under £100,000.

Confident in delivering value for money

Advisers and planners have high confidence in the service they provide their clients, but are much less impressed by some issues that are not in their immediate control.

Overall, 92% are confident in their firm’s ability to deliver good value for money, while 89% are confident in their ability to meet the advice needs of clients.

Only 26% are confident in the capability of the regulator, while under half 46% are confident in the stability of the economy.