‘No commissions, no ongoing fees’: Should advisers charge a flat hourly rate?

Speaking with ifa, financial adviser and founder of ID Advice, Nicholas Block, argued that advisers should be charging strictly on an hourly basis, and having just started his own advice firm, is now putting this model into practice.

“I was employed as an adviser for a couple of years, and then, for lack of better words, I got sick of the typical industry a little bit. I decided to launch my own firm doing things my own way, modelled on the other professional services businesses. Think of your typical accountant, law, and, to a lesser degree, consulting,” Block said.

“What that means is purely based on hourly billing. So, no other method of remuneration whatsoever – no commissions, no ongoing fees, no fixed upfront fees or anything like that, just purely based on an hourly rate.

“The reason I’m doing this is, I think that’s the way towards professionalism within the industry.”

He argued that charging on an hourly basis is more equitable as clients are only paying for the time an adviser is actively working on their case.

“There’s that point where the time to manage a $2 million portfolio is more or less the same as a $1 million. And whenever you say that to anyone, they’ll immediately talk about the risk. And I think that’s a moot point, just simply from the fact that lawyers don’t charge you more if you have more money, and neither do dentists or anyone else. I think that’s a moot point,” he said.

“They just charge you based on their profession and the time that’s gone in to develop their skills as a professional, and then that determines their end hourly rate.”

Block noted that, although he believes other advisers are supportive of this pay model and that it is a necessary step towards professionalism, they are concerned about the practicality of it from a business perspective.

“From the advisers I’ve talked to, they’re all on board with what I’m doing. They think it’s a great idea, and it’s an amazing idea. It’s just, they don’t think it’s going to be profitable, but they subconsciously understand that this is the most professional way to do things,” he said.

“Unfortunately, the industry is so enshrined in the way it does things at the moment that if you moved everyone to an hourly rate tomorrow, half of them would go broke in a week, and the other half would see the value of their business probably reduced to 33 per cent of what it was.

“Just by the way you value a typical advice practice off three times your recurring revenue or whatever it is now. You move to an hourly rate model and suddenly it gets valued like an accounting practice, which is like one to one and a half times because it’s not effectively guaranteed ongoing revenue through the ongoing advice fee model.”

He added: “People understand what I’m doing and they go, ‘Yeah, this is great’. They just don’t think it’s commercially tenable at the moment.”

While Block recognises the value of financial advisers, he explained that he struggles to see the justification for them charging clients thousands of dollars a year for only a few hours of work.

“Look at other professions. Look at accountants and lawyers. My hourly rate of $440 an hour is not cheap. That’s not cheap in any scenario. I would question the fact that, if you have a book of clients that’s generating X amount of revenue, if you think that moving to an hourly rate is going to severely impact that revenue to you as an adviser, what value [are] you actually providing to your clients within the year for you to be worth a $1,000 hourly fee, or a $2,000 hourly fee?” he said.

Block added: “I don’t think anyone would disagree that advisers do a good job. I think it’s just purely that the pay is not aligned with what the industry wants to be in the future.”