Putting the lights on
All the kerfuffle over Stephen Hester’s bonus ignores one key point. I wonder how many people would voluntarily give up significant income they had been promised for doing their job, particularly how many of the most vociferous critics?
It recently emerged that some of the biggest critics of tax planning in family companies are using the same devices to save tax themselves.
This hypocrisy is ignored by the media.
In a way, the RDR is similar where the FSA is the whipping boy but we have brought most of the change on ourselves through a lack of engagement, whether that is ignoring the direction regulatory winds were blowing or by failing to contribute to the debate. The latter generally happened as people sought to maintain the status quo no matter how screwed up it was.
Recent weeks saw Aifa lose Stephen Gay and while I do not blame him for leaving, I question the apparent absence of due diligence on his part before he accepted the post. In some ways, Aifa reflects the way many of its members think by setting an inadequate level of member fees, then wondering why it has an income shortfall.
Business is not complicated, you need to charge what it costs to be there, as my US pals say “to put the lights on”.
If Aifa had taken that approach, it would not be in the position it is in now. If Aifa delivers nothing else, its financial issues can serve to remind IFAs to charge a sensible amount, not just what they think will be easy for clients to accept. Aifa’s problems are not a new phenomenon.
The Life Insurance Association made the same mistake in charging low fees for bulk member but then providing them with services that needed full fees to support.
To survive and prosper, it is important that IFAs deliver propositions that are fully costed and can deliver service at a profit without the risk of cross-subsidisation masking problems that one day may leave little room for manoeuvre.
In the same way, if IFAs want effective representation, then cross-subsidisation must stop and the charge must move to per capita, with minimal discount.
Currently, most firms charge 3 per cent initial plus 0.5 per cent trail on investments and pensions. In previous columns, I explained the origin of this charge is provider-led rather than a reflection of costs. There is no doubt in my mind this will fall over time. What we do not know is how quickly. What we do know is that squeeze on margins will be fatal for some.
Robert Reid is managing director of Syndaxi Chartered Financial Planners