Consumers are being urged to review their financial planning strategies’ exit fees which are typically regarded as a valuable safeguard for clients.
The call-to-action follows the changes of St James Place Plc, a firm in the UK, which announced an extensive overhaul of its charging structure. SJP charges, it confirmed, on exiting plans are to be scrapped.
Following a 20% decline in the wealth manager’s stock on Friday (13 October) due to an FT report, it was revealed that the company is being urged by regulators to modify its fee structure to align with the new Consumer Duty.
SJP has been criticized for its high fees for financial advisors and penalties on exit withdrawals. Earlier in July, SJP declared a reduction in fees, notably a 0.15% reduction in the annual product management fee for approximately 65,000 clients.
What are exit fees?
Exit fees are associated with ending a financial advisory relationship or withdrawing from a financial product before a predetermined time. They are designed to cover various costs with the arrangement, set-up, management, or termination of the planning advice and/or investment.
Exit fees can take various forms. Some are calculated as a percentage of assets under management (AUM), some are redemption fees with back-end costs added, while others are flat fees. The structure of exit fees may differ among financial advisory firms and investment products.
Exit fees transparency
Consumers should proactively review the terms and conditions of their financial advisory relationships and investment products.
Knowledge is the foundation of financial success, and informed consumers can make more strategic decisions to safeguard their financial well-being.
Financial advisory firms, such as deVere, are expected to provide complete and transparent disclosure of all fees and charges upfront to their clients in initial advice. This should happen as a matter of course.
Benefits of exit fees for clients
Despite what has been expressed by some industry participants, exit fees in financial advisory services play a critical role in safeguarding consumers’ interests. It’s a myth they are solely a hindrance for clients.
Exit fees discourage quick withdrawals, which could lead to client financial instability. A fee for early termination incentivises consumers to stay committed to their financial planning strategy, ensuring better results long term.
In the case of mutual funds and investment vehicles, exit fees act as a deterrent against excessive trading, which can harm long-term investors. These fees encourage responsible investment behaviours.
In addition, as the financial advisory industry relies on long-term commitments from clients to provide quality services and support, exit fees help create a stable environment for advisors and firms, enabling them to maintain their commitment to delivering sound financial advice and services which benefit consumers.
Typically, clients find that exit fees protect their long-term financial interests.
You should engage in open communication with your independent financial advisor and financial advice firm, discuss exit fees and how they fit into your overall financial plan.
Asking about fees and costs upfront in general, not just exit fees, when working with a financial advisor is a prudent and essential step in establishing a transparent and beneficial financial relationship.
Knowing the cost of financial advisory services upfront ensures that both you and your advisor are on the same page regarding the fees you’ll be charged. This transparency forms the basis of trust and creates a healthy advisor-client relationship.
Also, understanding the fees allows you to budget effectively as you factor these costs into your financial plan, ensuring that they align with your long-term financial goals. This awareness helps you maintain financial discipline and avoid any unwelcome surprises.
In addition, knowing the fee structure, fund management, product charges and ongoing charges, helps you identify any potential conflicts of interest. Openly discussing fees can help you assess the potential for such conflicts and make informed decisions.