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Categories:Other,Regulation

Reid: Charging 3% plus 0.5% ongoing will not work

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After sitting for what seemed like hours on end, the generic advice standards steering group arrived at one significant consensus - that the right to define any service as advice rests with the consumer, not the provider.

The launch of the Money Advice Service should be welcomed by all of us if it achieves its aim of stimulating interest in all things financial. Whether this leads on to enabling people to do it themselves remains doubtful.

Some time ago, I found myself at the FSA discussing financial education. I suggested money was being wasted on trying to cover too much ground when the core issue in life was one of risk. The recent paper on risk and suitability provided evidence to back up my statement.

The only problem back then was that people were more interested in being seen to do something as opposed to actually delivering a long-term solution. Ego won over intellect, if you like.

The MAS follows on from various exercises that, if anything, prove just how difficult this type of education is in reality. We all need to guard against talking about or promoting concepts in a manner that is alien to our target audience, no matter how good it sounds to us. We are not the best judge and neither is the MAS.

Please do not tell me focus groups will help with this issue. They will not, as they do not contain the people we are trying to engage.

The MAS’s use of the word “free” to encourage users is what really riles me. It is not free, the industry is paying for it. Just how difficult would it have been to have had a strapline saying, “Funded by the distributors and providers of financial products and advice, no other taxpayers have contributed to the costs”?

To say it is free is outrageous - certainly not clear, true and not misleading, as the FSA would say. Perhaps a class complaint to the Advertising Standards Agency is needed?

Having been involved in the Personal Finance Society’s Citizens Advice project since inception, I fought long and hard to ensure all booklets referred to us as “donating our time and expertise”, to show our advice is valuable. Call the advice free and we walk.

Whatever happens to MAS, it will never be the only solution and we must work together if we are to solve the key issue of financial engagement.

I am sure we have clients who look at our charges and wonder what we did for them this year. However, simply to link activity with value for money is to ignore the fact that the fee enables access to professional advice from someone already well versed in your financial situation and goals.

We need money “to put the lights on”, to do the ongoing research and to remain current. An IFA’s costs are about more than the time on the clock. As we move towards 2012 and beyond, we will all be under pressure to define our costs and services. Some people will try to barter but that is best dealt with by asking them if they would barter with their own services or if their employer would.

They may prefer a service where they pay as they play but they will soon complain when we charge for rediscovery and reanalysis as the FSA expects us to do when there has been a break in service.

An IFA’s ongoing service, where clients pay for us to look after their assets and provide advice, is like a warranty on electrical products or the AA - you hope not to need it but it delivers peace of mind.

A conversation I am due to have with a client will take this no-use, no-pay view but given we wrote off excess time when we took the client on, I will not be for moving my charging structure as pacification. We may drop the client on to a lower level with no proactivity but that will involve ongoing cost as we do not offer the pay-and-play model.

It is interesting to watch the trends in fee charging. The default of 3 per cent plus 0.5 per cent trail has no science behind it and I am yet to hear a convincing argument as to why it was chosen.
The truth is mathematical, or should I say life company actuarial. Three per cent plus 0.5 per cent is equivalent to 6 per cent up-front, which is 5 per cent plus a Lautro 20 per cent uplift. When it comes to defending charges, we need a better reason than “we have always charged 3 per cent plus 0.5 per cent”.

As I said above, we need to heed the perspective of the consumer. I hear much talk of client-centricity but see little evidence of it in most adviser/ provider websites.

In the words of Sam Walton, the man who brought us Wal-Mart: “There is only one boss. The customer. And he can fire everybody in the company from the chairman down, simply by spending his money somewhere else.” That sums it up for me.

Robert Reid is managing director of Syndaxi Chartered Financial Planners

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Readers' comments (32)

  • Very good article.
    As to 3% plus 0.5% as fees may not be ideal, but if it is customer agreed (advsier charging) it is a start, but it takes time to transition both the business AND existing client attitudes.
    As for the MAS, very glad to see Mr Reid thinks the idea of the MAS is fine (I do too), but delivery of message is totally WRONG. It is not "advice, nor is it "free".
    Who will complain to the advertising standards agency and will they take any notice anyway?

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  • Aifa'a silence on the MAS advert is reprehensible but sadly not surprising. This is exactly the sort of issue they should be leading on but lack the 'nous' to do so. Bunch of complacent cowards IMHO.

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  • It rather depends on how wealthy the client is. 3% plus a half is outrageous if £5 million is being invested but loss making if it's £25,000. In any event, I thought the FSA had made it clear that all charges needed to be representative of the actual work carried out rather than just being a standard model operated by the practice.

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  • I thought the FSA had made it clear that all charges needed to be representative of the actual work carried out...

    Thats one way to look at it but it doesn't take account of the lifetime liability of giving advice. I need compensating for the fact I could be prosecuted for poor advice at the age of 90!!

    A life of PI Cover and protection doesnt come cheap!! All risks need to be priced and the cost of getting someone to the point of being able to do the work.

    % models do recognise the scale of the potential risk to some extent.

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  • I have already made my complaint about MAS to the ASA, I suggest all reader do the same. My issue was about the word "advice" in MAS, the suggestion it is "free" and the use of "unbiased" in their advert when that is also a term that has been promoted and funded by the IFA community.

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  • Now that Lloyds is going to make so much more profit what will they charge or they going to give ,free advice, to their customers no chance As before charges will be well and truly hidden They will probably get 2% per year and say it is a service charge.

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  • Paul Mcmillan

    The point I tried, and failed to make was 3% + 0.5% has no root in costs of providing or indeed the risk in giving advice. This combination was provider led and I agree that lower amounts may need to be charged at 3% if the amount is under £50,000, I believe that a level charging structure 1% +1% is  more akin to along term relationship.

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  • Quite amusing really !

    Lets look at what we want to charge and then work out what we are going to do for the money.

    Or lets see how long we take to do something then work out how much we should then charge.
    Might be a little better to find out what the public
    wants from the industry then try and work out how to deliver that at a profit,

    As for the MAS and its issues perhaps it just reflects what the regulator thinks of what we do and what we are worth. It also shows how little impact the various trade representatives - bodies and individuals - have actually had on the world we now inhabit.

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  • Totally agree with Robert's last posting. The emphasis now should be on the service provided both now and ongoing rather than taking a high fixed amount upfront regardless of the amount invested and the amount/degree of work carried out.
    Nothing wrong with charging a 1% annual fee as long as it is justified i.e, meeting at least twice per annum and rebalancing portfolios, completing new risk profile questionnaires, updating fact finds, reviewing overall financial position etc.
    Simply sending annual valuations in the post doesn't even warrant a 0.5% annual fee.
    Initial work should be recorded and preferably charged by the hour, although I have no problem with a 1% initial fee as long as the client agrees to and signs for this alongside the annual fee.

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  • @ Simon Burston - As a member of the AIFA Council I would invite you to engage intelligently with me as to what AIFA should be doing. I presume you are a subscription paying member? We welcome - and actively seek - all input but we don't have any God-given funding source so if you are not a paying membmer perhaps you'd like to put your money where your mouth is? Armchair warriors don't help win battles.

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