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Don’t just react – plan

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MGP Chartered Financial Planners managing director Kevin Cannon outlines how advisers can avoid the confusion which some industry
analysts say will reign in the post-2012 world

Since the last article, I have had the opportunity to talk at length with other IFAs and as much as I read about the post-2012 world, the more questions arise, so confusion can reign.

This is not meant as an excuse to take no action but a call to ensure the move to transition continues without delay.

You must make a start and maintain the impetus - the RDR is only 28 months away

Whatever model you choose, it will not be the first draft of your plan that is implemented. You must make a start and maintain the impetus - the
RDR is only 28 months away!

As one IFA mentioned recently on the transition to fees: “I’ve got 20 years’ worth of mistakes to guide me.”

I attended a PFS conference on RDR transition recently and my one abiding memory is the line: “Don’t react … plan” However, looking at other matters discussed and the way in which they will impact on my business, the day posed several important questions.

What market should I be in?
This can come down to a choice of independent or restricted advice. Instinctively, I prefer independent but consider the definitions:

Independence: ’To make recommendations based on a comprehensive and fair analysis of the market, and provide unbiased, unrestricted advice’.

Restricted advice: Any service failing to meet the new definition of ’Independence’.

We operate in the niche area of pensions and associated benefits, plus business protection planning. Personal investment and tax planning does not form part of our offering. As such, we must consider how the new definitions will operate. I believe that, in order to retain our independent status, we must offer a wider service, so that we can state that “we do consider all types of products in the relevant market”.

Action is planned on this aspect.

How do I charge?
We have moved over a 15-year period from a commissionbased IFA to one which charges fees but also lets clients select the commission offset route. Having said that, it’s inevitable that, in the transitional period, the ’fee’ decided upon might well resemble the level of commissionthat is currently available. This is a major issue and change is required.

Devise an action plan and devise a process
The process should form the basis of the charging structure. Charges are made for each element, allowing for the work undertaken and the category of person dealing with the particular element of the process.

What do I charge?
Our first draft of fee charges was little more than an educated guess. If a formal process can be devised, it will be easier to calculate fees to be charged for each area of the process.

Time sheets will help show how much time each task takes and help explain fees to clients.

We devised a process in the past and derived a charging structure to coincide with the process. All seemed well but we had not taken full account of the work involved within each element of the process.

We have started using time sheets and they have opened our eyes to the time each element takes. As such, we now appreciate that the unit cost needs to increase.

Process
This is a complex and fairly long-winded area of the transition and, as stated earlier, is fundamental in setting and jusifying the fee levels. There are many elements to be considered, which include:

  • What is done within the process?
  • Who undertakes the work within each element?

The advantage is that the process will help set the charging structure and, if queried, will help justify the charges made.

Ultimately, the menu of charges can include the process, so that clients are fully aware of the costs and the rationale behind the costs.

The internal forms arising from the process will also be a great help in ensuring that a consistent process is in place.

If the process can move work from the adviser to less expensive alternatives (administrators, paraplanners or the back office system), it will
help contain costs and improve efficiency.

Adviser charging
Hard as it may be, forget commission levels – it’s a defunct model. Furthermore, it’s based on what providers will pay, not what services you offer to clients – being optimistic, the ’rate for the job’ might well exceed the commission levels previously offered.

Non-regulatory work
If you consider the work undertaken for clients, there is a good chance that many IFAs offer some elements of their knowledge, services, etc, without charge. As part of the culture of moving from commission, we should become aware of this and, ideally, be able to raise another element of our service subject to a fee charge.

Qualifications
At one level, this is simple - level four is required for all advisers. There is not much time left, so a full analysis is required for each individual
and an action plan put in place to have the requisite qualifications within the next 28 months.

In the longer term, we need to be aware of the comments made about “targeting level six”. Chartered status might be the revised standard in the coming years so, once level four is reached, maintain the impetus and plan ahead on a voluntary basis to target Chartered status.

Certainly, recent comments by the FSA indicate that a higher standard is on the agenda for a (sooner than) later date.

Buy and sell opportunities
The pre- and post-2012 position will be interesting in that opportunities will arise both ways. If you want to consider a sale, it’s natural to want the highest possible value, so you must still plan, even if that plan is to sell. If you lack the requisite qualifications, the values can be significantly reduced.

In valuing a business, a range of considerations come into play, including:

  • Recurring income level
  • Sources of income
  • IT systems, in terms of compatibility, or ease of merging with the ’home’ system
  • Access to data, including the demonstration of recurring income and funds under management, etc.

Record keeping
Is the business independent from the owners? Financials, both in terms of current data and the trends indicated over recent years. Ultimately, the purchaser is looking for quality within the acquired business and that will impact on valuation.

Information gleaned from any enquiries into value can be used by both sides. If selling a business, any planning should ensure that the above-mentioned aspects are in good order.

If buying a business, due diligence will be vital in ensuring value is demonstrated.

Post-sale liabilities are relevant to both sides and that may well determine whether the transaction is a purchase of shares or assets.

The decision on the format adopted clearly has implications on personal taxation but do not under-estimate costs.

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