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Categories:Other,Regulation

Alan Lakey: Why my clients won't pay a fee

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Having discussed the pro’s and con’s of the RDR with numerous industry stalwarts such as Roderic Rennison and Danby Bloch, I decided to bend to their considered opinions and test the imminent adviser charging experiment on my clients.

I selected carefully. I decided that to start with I would focus on lump-sum investments. I felt that a gentle introduction would be best so as not to terrify existing clients who might need to be weaned off the “free advice” they had been happily getting for over 25 years.

This translated into our old friend the commission offset model whereby I would estimate the time needed to provide the advice and would then transform the resulting time into a fee. The fee would be chargeable if the clients did not proceed but if I received any commission on the investments, this would reduce or wipe out the fee.

Enter Mr&Mrs B, she a legal secretary and he a golf club green keeper. Clients for 15 years, they had recently sold their property and were in receipt of £110,000 that they needed to invest with a focus on retirement income. Despite a broken leg, Mrs B and her husband braved the ninemile journey and they respectively hobbled and strode into my office.

Their desires were typical in that they evinced a cautious approach to investment but wanted growth beyond that available within deposit accounts. They had a 15 to 20-year timeframe and no requirement for pre-retirement income. Also, they each held pension plans invested in equities and fixed interest.

The discussion went well and I explained the novel method of charging that I now operated. I informed them that the FSA, which knows all about these things and is a force for the general good, had decided that it was in their interests for me to operate in this trans-parent manner and that they would be enfranchised. They nodded and made the appro-priate noises, no doubt silently thanking the denizens of E14.

I explained that their requirements would likely be met by a diversified portfolio of cash and investment Isas, high-interest accounts, National Savings & Investments, investments bonds and additional pension funding. I advised a fee of £750 which would be reduced or wiped out by any commission received.

A week later, they emailed explaining that they had sorted it via the Nationwide Building Society.

Now let us consider this. These were long-term existing clients for whom I had arranged mortgages, a pension plan and various life health and redundancy assurances. Apart from two cash Isas with Barclays Bank, they had used my services for every financial matter since 1996. They clearly trusted me and had made extraordinary efforts to visit despite the wife’s injury. The problem was neither trust nor lack of confi-dence that I could provide the solution, it was the fee.

These clients, like the majority of consumers, had not pre-viously paid or even discussed payment of a fee. Despite working for a solicitor and under-standing the fee structure, Mrs B did not feel comfortable with the idea. Of course it might be that it was because she worked for a solicitor that she did not feel comfortable.

So, having rejected the new customer charging world, they scurried down to Nationwide, which we know is tied to Legal & General. No doubt the nice man at Nationwide arranged a portfolio of investments with far higher charges and comm-ission than anything that I would have arranged with my 3 per cent maximum comm-ission stance. If these clients are typical, we will inhabit a very different world in 2013.

Alan Lakey is partner at Highclere Financial Services

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Readers' comments (53)

  • As usual, a well written article, though perhaps it was a mistake to hit the clients between the eyes with a fee figure of £750 right at the first meeting.

    My approach would be to explain that the overheads of maintaining my business (and supporting the four-tiered costs of supporting the current regulatory structure, not to mention occasional supplementary charges as well) have become such that we simply cannot provide advice on a speculative basis any longer. As a result, we now charge an initial report fee, with the subsequent costs of implementating of our recommendations (assuming that's what happens) covered either by way of deductible CAR (which will still be allowable after 2012) or a subsequent fee, as the clients may choose. So my initial fee would be, say, £375 ~ which might not cover fully the costs of all the pre-sale work and at which the clients might still baulk, but such a figure would be rather easier to digest than £750. And, once paid, there'd be a pretty good chance that the clients would proceed, for the simple reason that they would have already paid to get halfway there.

    Some clients remain wedded to the idea that commission-based advice somehow doesn't cost them anything and refuse point blank even to countenance the idea of paying any fee. But, in my experience, such people are a dwindling species and more and more are, in fact, prepared to pay at least a reasonable sum upfront for advice that, if it really is advice as opposed merely to a steer towards the sale of a product, cannot be provided on a speculative basis. I guess it's a matter of how you sell the fee.

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  • I don't believe that what they got from Nationwide was advice they were simply sold a product. It may have had some advice bundled in with a product selling proposition but it wasn't advice as it should be

    I agree with Julian that more and more people are understanding that commission is not a "no cost option". I do though think that if a client is told that they have to pay a fee because the FSA says so that might constitute a very good reason for not doing so!

    If an advice fee is only not payable if they proceed to product implementation I am pretty certain that might also constitute a barrier to them saying "yes" Advice is a valuable item and Alan needs to be paid for the experience skill and expertise that he brings to the table but under adviser charging he does of course still have the option of doing the advice speculatively and only charging for implementation if he chooses to so in that respect the RDR changes nothing.

    No doubt Alan will do what we all need to do and fine tune a proposition that clients value and are willing to pay for and if experience is anything to go by the more powerful the proposition the more times he will get a "yes"

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  • Get Real! With Unemployment at 2.5m plus & real disposable income reducing by the day.Clients also struggling to feed & keep a roof over there FAMILIES heads - do you really suppose (without education of course), that average middle class Britain can afford or even contemplate paying fees!If they valued & understood it - maybe - but in light of all the scare stories & perception of Financial Services in general -As IFA'S we haven't got a SNOWBALL'S IN HELL chance of making a viable & practicle living post 2012!If the ever increasing Exams don't get you - the lack of reasonable PROFITABILITY will! The FSA or equivalent will make sure of that!They want the BANKS to succeed to repay all that lovely Taxpayers DOSH!

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  • I believe Alan actually did the ethical thing by being totally upfront with the clients about the fee.

    We are constantly being told, by people like Nic Cicutti that we should not be salespeople, but Alan is getting criticised for not selling the fee proposition correctly. You can't win sometimes.
    I have also put the fee proposition to a few long standing clients, last year, and they were not keen to change the way I have done business for them at all. Unlike with solicitor's legal work lots of the public think they can do it themselves, when it comes to investing, and of course they can, although they often make a mess of it.

    With the rules as they are, at the moment, I have taken to explaining to clients that they can either pay a fee and I will subsequently charge them for all the work carried out on a hourly basis, or I can be paid by commission, which will still come out of their money and I won't present them with a bill for any other advice or queries they have in the future, so they won't have to hesitate to call me at any time.

    I have not yet had anyone opt to pay by fee.

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  • Well, the apologists for RDR are obviously going to point out that from 2012 Nationwide would have had to disclose its fee as well. And they have a point. Why give up a competitive advantage before it's actually necessary?

    It's a bit like offering unisex annuity rates to men before the EU sex discrimination law comes into force, and then wondering why half your customer base has gone elsewhere. It's no use bleating that it's "the right thing to do for the consumer", the regulator set a date, your competitors are going to wait for it and so should you.

    Of course, the problem is that RDR won't force Nationwide to disclose the fees you pay them for keeping the money on deposit - the ones hidden in the interest rate - so even after 2012, this problem won't go away, people will just get ripped off via the mechanism of inflation and interest spread rather than commission.

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  • It should have worked because the clients were being offered commission rebates to cover the cost of the fee. However, post RDR there are no commissions to rebate. There are therefore no fee based advisers at this time, and pro RDR IFAs who think they offer a fee based service now, and think they are RDR ready, and think they will survive post RDR and the competition will diminish, do not, as far as I am concerned, understand how business works. Pro RDR advisers are attempting to base a business model on the ridiculous notion that they will perform marketing and distribution on behalf of product providers free of cost to product providers. Ever since the mid 90s this cost to product providers has been disguised as "cost of advice" paid for by clients.

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  • To me this article simply highlights the need for better information.

    We find that once a client understands that the long term charges are significantly lower by using 'wholesome, non-commission products' that generally go on to save them thousands of pounds in the long term, they are more than happy to pay a fair single fee for this valuable advice.

    In the face of this evidenced cost saving, if a client insists that they would rather have it 'free now' and then pay well over the odds over the long term - they are most likely better suited to Nationwide!

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  • I have just inherited a client who was going to be charged £400 to be told whether he should opt in or out of S2P in connection with an 'opted out' policy. 2 years later he hasn't made a decision because he couldn't afford the 'advice'. Welcome to the post RDR world.

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  • I work in insurance, can you imagine the reaction if I started charging a fee for arranging car insurance - even if I said that I would deduct the commission from the policy I arranged?

    The average premium is £800 or so, so I would get £80.00 commission on a policy - if the customer took it out. Would anyone pay £10.00 to obtain a quote from me and then £30.00 to arrange the policy if they wanted it? Would you?

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  • They might be a'dwindling species' but regretfully they are many and my experience is the same. Thus far it has resulted in substantial loss of income. I remain in full support of charging fees, but its hard work, and only the blessed few have no trouble with the idea. I could be wrong, but if advisers, as a whole, had a plan we all stuck with collectively we might at least get past the starting gate.

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