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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)

  • When I say there is no such thing as a fee based IFA, I am talking about IFAs, not unit trust advisers masquerading as IFAs. And even unit trust advisers have to accept the fact that if a client goes direct to a unit trust provider they don't get the product any cheaper. There is no such thing as a fee based IFA. Period.

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  • As they say it’s all in the presentation. However these clients must be a thick as tow short planks if they didn’t understand. (Provided it was explained properly).

    If they were shown that if the bought a bond their £1,000 would actually have £950 invested (full allocation merely means a bigger hit on early surrender) – they may possibly have viewed things a little differently.

    Anyway I have been charging fees for years with absolutely no difficulty. I think over 15 years perhaps one or two may have railed – but I regard that as no loss, I donm’t want clients who are either thick or don’t value my service. All existing clients are perfectly happy. Oh and by the way John Wood – I also have a General Insurance department that actually does charge fees on a regular basis (not always -s admittedly) – for car insurance and most other personal lines. Again no problem. Customers know and value the fact that we provide a service and are happy to pay.
    If you aren’t confident with your value and with fee charging it is hardly likely that the client will be comfortable. All this nonsense about the Regulator forcing your hand merely underlines your unease. To plagiarise Cheryl Cole – “Mr Client this is my fee – because I’m worth it!”

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  • Ken, with all due respect, I disagree with you. I don't know where you are coming from so perhaps you could enlighten me - what exactly is a Unit Trust Adviser? Are they tied? Who regulates them, the Unit Trust Association?

    Are you really suggesting that anyone that specialises in investment isn't an IFA? Does that also hold true for advisers that specialise in pensions, or protection. What exactly is your criteria for being an IFA (it's probably worth noting that it's your criteria), because no matter how hard I look, I cannot find anything in the rule book that says I'm not an IFA under my current model.

    Additionally, I'm directly authorised by the FSA as an independent financial adviser, and unbiased have me listed as an independent financial adviser, seems like it's just you that might have a problem with that.

    I know of many advisers that specialsie in giving investment advice, all of whom are IFAs. If we're missing some vital information be sure to let us know.

    And another thing, your comment about having to accept the fact that if clients go direct they don't get the product any cheaper - how does that affect whether someone is an IFA or not. It might be a legitimate claim, but it doesn't have anything to do with your original argument.

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  • I think Alan's experience will sadly be typical. We started discussing these matters with clients, who all said that they were perfectly happy with things as they were and did not feel comfortable with a change.

    We tried the long explanation, setting out how charges are taken and why fees would in the end be cheaper. No dice. Luckily we have a fair few VHNW clients who invest so much that only 0.5% of funds under management without any up front charge makes the business profitable. The 80/20 rules also works for us so in simple terms, the 80% non VHNW will either pay us or walk post RDR.

    Advisers with non HNW clients had best start either cutting overheads big time, probably by cutting support staff and closing down offices, with all the service detriment that will result, or find another job. I also think that if the size of the job Alan describes was properly costed through, including business overheads, £750 wasn't high enough to be profitable unless Alan works on his own from the back of a van.

    The pre RDR world isn't perfect I agree, but the thought of rivers of lambs heading to slaughter at the Banks is not good news. That's what is going to happen however, so best to face up to it and take evasive action.

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  • Alan, thanks for clarifying. As you say time will tell, but as Mr. Katz points out, if the fee concept is explained clearly, it's hard for anyone to say no. I got a request last week to advise an individual who was taking early retirement from Royal Mail. He wanted to know whether the reduction in his pension was a good or bad decision.

    He understood the fee concept and was happy to pay a fee....but could only afford £200. I felt really bad as I had to politely decline, but he understood.

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  • I am all for fees but if it is going to stop consumers taking advice then surely this is not what the FSA or the whole economy wants.

    I can see the day when no new blood can join the industry unless they have a large sum of cash behind them to allow them to live for the first 12-18 months.

    How do we expect Graduates or business talented people to fill the gap of advice if you need say £40/50K to get you through this period.

    Starting a business is not easy in this economic environment and will be even harder after 2012.

    As for advisers having HNW clients whose trail/fund based fees cover the overheads new advisers will not have this luxury so perhaps the HNW advisers need to think how they see new blood entering our industry.

    I can see more advisers working from a home base to reduce costs and perhaps outsourcing admin etc via paraplanners etc. This then impacts on local economies, and it continues to bring towns down.

    RDR will certainly have a negative effect, we all know this and I think so do the FSA but they are not willing to reconsider some aspects.

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  • I have enjoyed the comments from both perspectives. As far as I see it, transparency is the key, whether in terms of being paid commission or working on a fee. I always ask the client to acknowledge the income I will receive, in the case of commission by signing next to the commission declaration on the illustration / KFD.

    Having worked in a fee-paying and commission paying environment for a number of years, my problem with fees stems from the fact that a client might choose NOT to contact me, as they think it will incur a fee or "the clock is ticking". I relish client contact and actively encourage it. I regularly advise a client on National Savings or Cash ISAs, where I know I am giving "free" advice. If they think they'll have to pay a fee, then they might choose not to contact me. The problem with commission has been both greed and the lack of transparency , i.e. how much is the advice costing the client.

    I have apprciated the constructive comments made. Can I encourage more of them? I want to learn - I'm so NOT perfect, but my goal each day is to put the client first. It's not easy, as we all know!

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  • 'Why my client's won't pay a fee ' is a sentiment I agree with.However we need to move on to those that will. If there are 20000 advisers left after RDR each looking after a maximum of 250 clients that means we are at capacity at 5million. Given the population is 62million that is less than 10% market penentration. The future will be looking after fewer clients ,in greater depth and crucially people who appreciate your knowledge and skill.
    Too many advisers have spent too long developing relationships that, as Alan has found out, are not commercially based.This is unsustainable.How can it be right the public expect life changing advice for free with all the obligations that go with it (FOS etc) I look forward to dealing with people who recognise my skills AND will pay for them. We are set to become e rare breed indeed isn't it about time we capitalised on it ?

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  • Spot on Duncan.

    The lesson is: never give away your knowledge for free expecting someone to do business out of "loyalty".

    Mortgage brokers are finally learning that their antics of giving free advice created a mindset which (justifiably) led their clients to the internet or a bank.

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  • A very interesting array of comments here. Funnily enough, even though I've been operating on CAR for the better part of a decade now and yes, I've lost a few prospective clients as a result, I'm actually starting to encounter clients who, once they've written their cheque for the proposed investment, ask about writing a second cheque made payable to me (my firm). It happened just this very evening. At that point, I have to point out to them that we'll be paid by way of the commission (deductible CAR) that we've just discussed and to which they've already agreed. How strange is that? Weren't you listening, dear client?

    I'm certainly no maestro at getting people to pay fees, but when you go out of your way to be open about how CAR works and the amount involved, it's slightly unsettling to find that that some clients still think it means writing a second cheque.

    Having said all that, I still think it's best to present your fee for your pre-sale advice (itemise it so the client understands just how many bases you plan to cover), charge it upfront (if they won't pay, then you have to write them off) and leave until your next meeting any discussion of CAR for implementation. That's what I do and by and large it works.

    Some input and clarification from the FSA could well be helpful (remember what the Code says on this subject), not least on these very forums (which is why I think the FSA ought to establish its own forums).

    As I understand it, firstly you're not going to be under any obligation to charge a fee, either for your pre-sale work or for implementation. Secondly, your CAR can still be by way of a deduction from the sum to be invested into whatever product/s you're recommending, so there won't, in practice, actually be much difference between that and CAC. If you practise the latter already and if you have difficulty getting clients to pay a fee for your pre-sale work, then you'll be able to carry on much the same as now, namely doing the pre-sale work on a speculative basis which, to my mind, is no longer a sustainable business model.

    The only distribution channels likely to experience any real difficulties with CAR are those used to taking excessive commissions without discussing them with the client ~ which, after 2012, they'll HAVE to do. Alan may have lost these particular clients to a building society but, if the banks and building societies are forced to operate on CAR just the same as us, then after 2012 the clients will find that going to Nationwide or whoever won't actually save them any money at all or, if it does, then paying less will mean getting a great deal less in return. Perhaps the only thing we really fear is fear itself.

    And finally, just for you Alan ~ Welease Woderwic Wennison!

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