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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)

  • I think you have just highlighted what we have all been thinking. The FSA believe that we should charge fees so we can be on a level playing field with solicitors and accountants. Unfortunately solicitors and accountants do not have a competitor in the shape of banks. People obviously expect to use and pay a solicitor as usually it is a requirement and the results are easily quantifiable. Similar to an accountant where it may be a legal requirement to have audited accounts. The public already have a fee based option if they opt for it but we all know the vast majority prefer commission. If you are dealing with HNW clients then usually they understand the rational of fees and are willing to pay for the service. The ordinary man on the street does not. Is it to late to stop the FSA destroying our industry?

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  • An existing client approached me recently, he wanted to save £200 per month for three tears or so. He wouldn't have to disinvest for some years after that. I offered to test his attitude to risk and recommend an initial spread of funds that were suitable. I would charge 3% plus 0.5% fund-based, and a one-off charge of £100.
    Guess what? He's not prepared to pay the £100 and I can't afford to carry out the work for anything less. Impasse, I'm afraid.
    Thanks FSA for making life impossible. And that's for advisers and the public alike.

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  • I cannot say that I am surprised that Alan didn't achieve a a desirable outcome. For one thing, I don't think (judging from everything Alan has said and written in recent years) that he actually believes fees will work for him. So walking into a meeting with that thought will (on some level) have an impact. Deep down he probably wanted to fail just so he could justify his position. I imagine he would have been gutted had it worked :-)

    I'm not trying to have a go at Alan, and I hope he knows that, but shifting a business from commission to fees isn't easy, even if you're 100% pro fees. The conversation with clients is different, and understanding what will turn a client on to fees rather than off, is often very subtle. Telling someone that the FSA is twisting your arm to go down the fee route isn't a convincing argument. OK so maybe I'm paraphrasing a little too bluntly.

    I think I know what I'm talking about, and over the past 5 years I've made so many mistakes when introducing fees. That's despite being an early adopter, I set my business up to operate solely on a fee basis.

    Sometimes you feel you really are banging your head against a brick wall, until you step back and view the conversation from the clients perspective, not from what we think they want to hear.

    I admire Alan for taking the plunge (particularly given his anti-fee stance), and hope he'll keep on working at it. Anyone who thinks that they can simply make the switch come 2013 is deluding themselves - it's not a walk in the park. It takes practice, and there'll be more mistakes. Sometimes it's the tiniest things that cause a client to shift one way or another.

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  • Hello Alan, it's your friendly "industry stalwart" Roderic responding.

    As ever, Nick Bamford's comments are ones that I agree as well as some of the others but there are few of my own that you may - or may not - find helpful.

    First, I would want to find out why your clients went to the Nationwide for advice. Was it as you imply, because they were scared away by the fee or for some other reason.?

    I suggest that you get your partner, who I think is your wife, to call them and say that you are always intesrested to find out why clients do not proceed with your recommendations.

    Client research is an activity that most intermediaries do not undertake and this is a mistake in the context of building robust propositions in relation to Adviser Charging. Once you are clear what elements of the services you offer that your clients value most, you can target your proposition(s) accordingly.

    Second, I do not think that the amount you were quoting as a fee was excessive. Indeed, as Nick recently stated in an article on the subject, charging too little will put some clients offas they will not believe you can deliver the service for the sum quoted! Rather, I suspect your clients may nor have fully understood what you were going to provide for the sum quoted and this highlights the need for intermediaries to be able to clearly articulate what the client is going to get.

    Finally, there is a difference in relation to fees/Adviser Charging between dealing with existing clients who have not paid "real money" but who have rather paid you via commissions and new clients. The approach needs needs to be tailored to explain carefully how they have paid in the past and why Adviser Charging with its transparency is advantageous.

    Adviser Charging is coming, I would not advocate what one respondee is suggresting namely to do nothing until 1st January 2013 not least because it's important to put systems into place and ensure you have thought throufgh all the issues and objections. Otherwise, come January 20143, you may well find a sharp initial drop in income. The press will also be brieing your clients so it will pay dividends to implement the changes that you need to make in advance.

    Keep persevering. Planning and practice are the key but the two most important words in this context remain "confidence" and "value". To be successful you need to be confident in what your are delivering to them and your clients need to believe what you are offering represents value.

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  • Without knowing the entire conversation(s) and from what Alan has said, I must say (with all due respect) that the answer he got was to be expected.

    1. This client believed everything Alan did was "free" - otherwise why object to a charge now?

    2. The fee explanation given was confusing - so much so that a "loyal" client of 15 years went to the Nationwide

    3. The clients had no idea of what this new conversation was about and probably felt this was new charge being put on them after so long of trusting

    What the above shows is this:

    1. It is crucial to explain what you are doing, and why, in simple terms

    2. Clients must always be shown a comparison of how commission works against a pure fee

    3. Nothing of intellectual value should be given for free, or made to be thought of as free, unless it is work for done the CAB

    As Dennis says, maybe Alan went in with a different mindset. However, this is just one experience which shows us that (many) clients had no idea about fees/commissions and just trusted their adviser. It shows how trust can be broken unless careful attention is given to what is said in this new world.

    What it also shows is that a better explanation would have invariably resuslted in client retention and satisfaction. If you can't explain your value, no one else will guess it.

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  • Good piece Alan,
    I have had the same resultant rejection of the fee model from both long-standing and new clients alike.
    Even when I have showed the client the better outcomes, from the upfront fee model against the pre loaded establishment charge model, there is a reluctance to pay what is seen to be excessive fees for a 90 minute meeting. Yes I explain the work involved behind the scenes, yes I explain the costs of running a practice and yes I am a competent communicator who can make himself fully understood, yet it is the reluctance to see a cash amount set aside from the intended investment pot being siphoned off before the money is put to work that clients object to. Yet talk about a 5% bid/offer spread and a 1.75% establishment charge and they are happy in their ignorance.
    When long term clients question the need to charge £750.00 to arrange several contracts for a £110,000.00 capital investment, what chance do you have of making a living at 0.75% initial charge and perhaps 0.5% trail commission? It can only be down to the break from the advisory joint conspiratorial nature of our current business models, whereby the client feels safe in the knowledge that they have someone to blame if it all goes wrong and someone to hold their hand through the mind-boggling decision making processes that are required who, although they get paid by the provider, is trustworthy enough to warrant that payment.
    For the 20 year + IFA in a small practise I think it highly possible that it is the personal nature of the way we interact with our clients that is the stumbling block, once the payment is from client to adviser there is a direct link with the advice and who to blame if it all goes wrong, without any provider / third-party involvement to soften the facts or blur the nature of a complaint. We paid you, not the provider, therefore if it all goes wrong we won’t be dealing with an unknown entity at the end of the phone, we must confront someone with whom we have shared our confidential financial and emotional thoughts and feelings, invited into our home, socialised with and hold in high regard. After all who likes to complain to a Solicitor or Doctor?

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  • We have recently made the switch to fees/CAR. We segmented our client bank and wrote to them all offering them three service levels. I was really surpised by the results. Some clients that I was sure we'd lose (as they aren't very wealthy and so the fees to them are substantial) have stayed with us and indeed complimented us on the totally transparent way we're now doing business, which hase been really pleasing.

    On the other hand, some clients who can well afford our fees and for whom we can add serious value are less enthusiastic and dragging their heels. One, who has been a client for 15 years, asked me if there'd be a discount for loyal long-term clients. I told her that she was very welcome to a discount but that in order for us to make a profit we'd have to reduce the service provided. She signed.

    Charging fees (and we still have lots to learn) reminds me of the Henry Ford quote - 'Whether you believe you can or believe you can't, you're right'!

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  • Maybe I should clarify something that may become 'fact' if it's not stopped in its tracks (a bit like the FSA's RDR evidence).

    I have no problem with fees. In fact, I would dearly love it if all of my clients agreed to pay me a retainer or a one off fee for every piece of work. Currently I provide lots of 'free advice' for clients where there is no realistic means of charging them. I do this in the knowledge that I will earn from them at a later date.

    In this particular instance I was shcked to find that the clients had gone elsewhere and, no Dennis, I was not happy to have my fears confirmed.

    The point of the article was to highlight that, despite the FSA's theories being forced down our and our clients gullets, the concept of fee-charging does not sit well with a sizeable section of the population.

    Maybe they will warm to it, maybe they will go online, maybe they will visit bucket shops, maybe they will do nothing. Events will determine.

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  • I still keep seeing IFAs talking about their fee-only business. There is no such thing while commission exists, and while there is a differential bewteen the wholesale and retail price of unit trusts.

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  • Alan, I'm happy to be corrected about your stance toward fees and retainers. Thank you for the clarification.

    Should we be talking about fees though? The terminology is Customer Agreed remuneration isn't it? Whatever that means. Yet another ill thought out piece of terminology from our regulator.

    CAR? I hardly think that accountants or solicitors allow their clients to 'agree' the fee, as though there was some idea that each client can negotiate what they think is agreeable. Our schedule of charges is established before the cleint walks through the door isn't it? Yes they may be some discussion and some room to manouvre, particularly with higher value work, but CAR, that's creating expectations that shouldn't really exist.

    I would like the FSA (or FCA) to establish a form of CAR regarding my fees and levies. Fat chance.

    I also agree with you Alan that fees as they are presented do not sit well with a large proportion of the UK population. But they can be brought round if it is presented differently.

    Finally a reply to Ken Durkin who says that there's no such thing as a fee only business. Take the blinkers off Ken - some firms like mine choose not to write protection business, don't write traditional life company business, and on the rare occasions we do see commission free terms or go elsewhere. We also use institutional funds and ETF's rather than commission based retail unit trusts. I know that we're not the only ones.

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