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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)

  • Some nifty software is needed so you can show a client fee and non-fee options at this point.

    From the comments, it is also clear that the mass middle market (which is the IFA's domain) is not quite ready for this change.

    I know of a company in London who has been charging fees for 10-years (commission offset) and is an incredibly profitable business. No.1 They only deal with people who have GBP1 million minimum to invest and No.2 Tend only to deal with lawyers and accountants. They have completely narrowed it down to the 'market of least resistance'. Good for them of course, but not good for the vast majority of IFA's I would have thought.

    IFA's are going to have to move up the food chain if they are going to make this work I think.

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  • There are a few advanatages of being old and one major one is that I am old enough to retire and leave the mess behind me

    But the fact is that you can take a fee from the product as we doi now

    So as long as a client implements our advice we will still be paid

    it is when they don't implemenet it or the eadvice we give is to invest £15K in index linked National savings certificates

    Or to research a pension transfer and the advice is to leave it where it is

    With new Prospective clients this will not be a problem but wuth existing ones it is and this "sale" of the concept of fees needs to be sold carefully and correctly otherwise manty others may choose to retiure too.

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  • Its quite fascinating reading the responses to Alan Lakey's article because, just like the FSA, so many respondents find it difficult to deal with the world outside the office door. And that remark doesn't relate merely to this article.
    By co-incidence when I opened my electronic note book to construct this response another article was open with the title "The client doesn't matter". And there is a feeling flowing through so much discussion that the client doesn't matter.
    The view points being expressed are about charging structures and what is right, ethical and commercial, and how to explain it all to the client
    But there us no evidence that the FSA at any point did any serious research on the question of how the client wanted to pay for the advice/sales process provided. Nor did they determine whether any "commission" bias was meaningful or marginal (Alan Lakey has pointed out the Charles River report of 2005). Nor did they determine whether any other option would have a genuinely beneficial outcome.
    When you go into a car showroom does anyone seriously believe that the car salesperson does it for free? Does anyone believe that the car salesperson is going to present the customer with the cheapest, most effective solution to their needs - e.g Sorry sir, we do not have that product, but the ABC car showroom down the road has just what you need. No Sir, having the sports extras are really just a waste of money. There are ethics, there is professionalism and there is commercial survival.
    The FSA do not have to address any of those aspects, and I know that there are many people out there that would suggest the FSA have never shown those qualities themselves.
    But we are having wonderfully fruitless arguments amongst advisers about how to address the problems the FSA have created. What Alan Lakey's article demonstrates above all else is that no asked the customer!
    What a healthy business sector should have is a full range of options - including self help. Even now it is becoming increasingly difficult for the "man in the street" to buy some products; insurance company web sites are constructed such as to make an ordinary purchaser feel unwelcome (I understand they are protecting themselves against the ravages of the FSA); there are many products that are unobtainable except through an IFA.
    It really shouldn't matter that much how we explain to a client how they will pay. I would even question why we have to tell clients what they will pay to the adviser. Do you know how much the car salesperson took on your car; how much the builder took on your house; what the mark up was on the suit you bought?
    If the market were on a genuinely commercial basis the client would have a range of options - I'll pay a fee; I'll remain ignorant and let you take commission; I'll go to Nationwide to buy life cover and to Alan Lakey for pension advice. A long time ago there was a survey that demonstrated that the life companies used by IFAs had significantly lower charges than the direct selling companies. Competition did work. And in my opinion the market was a lot more innovative.
    Now it's a bit like going to Church and being castigated by the parish Priest for being unreformed sinners.
    Read those responses again and see how introverted we have become under the Canary Wharf Taliban.
    The client no longer matters - Long live the Process.

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  • @Duncan Jones

    "Given the population is 62million that is less than 10% market penentration."

    The market for IFAs isn't even close to 100% of the population. You need to strip out everyone who is too young, everyone who is either too intelligent or too stupid to seek advice, and most importantly, the vast majority of people in this country who do not have any spare savings or surplus income to advise on.

    Once you have gone further and removed those who want to have a chat about their finances without having a bill shoved in their faces, 5 million potential clients sounds incredibly optimistic.

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  • Ladies and gentlemen of this site

    Sincere apologies for the bad layout and typing in my post (above). As many may know I rarely do my own typing. I do try to check was goes out, but in the past week the system failed. Being holiday season, it goes to show that not all temporary appointments work out!

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  • Something for all commission based salesmen to read - written by Paul Lewis!!

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  • I have just read Ken Durkin’s posts carefully.
    I often find that I can agree with Ken, but on this occasion I really think he’s way off beam.

    If you want to spend 30 minutes I can categorically demonstrate that fee charging IFAs DO exist.

    Yes I sometimes use CAR, but equally (and perhaps more often) the clients write out a cheque. This is not only for investment business (how else would you get paid for advising on Investment Trusts and Bank Accounts for example?) but also for life assurance.

    By the way – CAR does not have to rely on commission. After 2012 when (if?) the providers offer ‘clean’ contracts and investments the CAR charge is merely added (or subtracted) from the premium. So £100 CAR on £1,000 investment leaves a net investment of £900, or alternatively £1,100 leaves £1,000 - Simples! Same applies for life assurance – if you want to charge via CAR rather than a ‘clean’ and more cost effective fee.

    Where CAR is often the better option is with pensions (providing you don’t hit funding limits) and the client then has the advantage of immediate tax relief on the fee (and HRT relief later).

    Reading through the posts I can only conclude that there seems to be four main hurdles that some people find they are unable (or unwilling) to overcome.
    1. They have no confidence in their own value to the client.
    2. They lack the necessary commercial and communication skills to put the proposition forward.
    3. They are so mired in the past with their reactionary attitude that they just will not consider the opportunities
    4. They somehow believe that they have a social duty to provide advice to everyone and anyone that comes across their threshold and seem to overlook that they are a business

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  • I agree Harry and I would add one thing. It appears to be a male thing, but why leave it to the last moment to move over to fees? We saw fees on the horizon five years ago, so why has Alan left it so late? (It is fairly obvious I would think - the RDR was never going to happen...) It is far easier to transition over to fees over time and if you lose the odd client over that period, so what? And at least you had commission to fall back onto if you really wanted to keep the client.
    One further point, the FSA want advisers to provide advice. It is clear that this has been misunderstood by many here - they think a product must be sold together with commission and that constitutes advice. No it does not. Advice may lead to a product but the product is not the end game.

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  • Please correct me if I am wrong, but to be called an IFA after the 1st January, 2013, you have to be "Whole of Market".

    The FSAs definition of WoM does not refer to a single market sector, ie investments or pensions, it refers to the fact that you must be able to advise your clients across the whole financial spectrum. So please tell me, all you investment specialists, who only deal with HNW clients, how are you going to keep your "independent" status when the RDR hits?

    I am afraid that unless you are suddenly prepared to start advising on mortgages and protection, not to mention overseas property purchase, equity release, long term care, private health insurance, stocks & shares, general insurance (need I go on?), then you are all going to have to operate under the "Restricted Advice" banner. How are you and your HNW clients are going to like that, I wonder?

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  • Educate educate educate - fee or commission it doesn't really matter. The client needs to understand they have always paid a fee (albiet via the selected provider) through much higher upfront/ongoing charges on their investment which may have impacted on their returns.

    In the long run paying a fee is a more cost effective option, they will save on charges which help towards better returns and enable advisers to move away from the free advice world!! In my eyes, if a client doesn't want to pay for the advice do you really want them to be part of your client bank?

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