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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)

  • Clive

    I thought all IFAs did this already - and althogh my firm does General Insurance - this is not part of the FSA specification for independence.

    What makes you think that HNW clients don't want mortgages or life assurance. The numbers are bigger - that's all and often the life cover is for IHT mitigation. Overseas property is a common factor and who else but HNW can afford PMI?? And so forth. You must inhabit a very stange world.

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  • Clive

    Harry is right - we do already do that and have done for years.

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  • Shouldn't this article have been titled "Why 1 of my clients didn't pay a fee?"

    Or is that not sensationalist enough?

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  • Harry & Huw

    I am very glad to see that you are offering the complete package to your clients.

    My point, however, is that there are many IFAs out there who wouldn't dream of getting 'down & dirty' in the less-than-glamorous world of mortgages and life assurance, and I am wondering how they are going to cope in the post-RDR world. Will they be prepared, I wonder, to take their CeMAP exams or Equity Release or Long Term Care exams or will they be happy to operate under the banner of "Restricted Advice"?

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  • I don't write the headline titles, LeeD

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  • @Huw

    In your earlier post a day or so ago you mentioned that 20% of the client bank more or less paid for the other 80% because they were VHNW. How do they feel about that? I would have thought that the whole point of fee charging is that everybody is treated on a commercial basis exactly the same.

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  • Independence doesn't have anything with investing on life insurance, mortgages,equity release etc. RDR is only for investment advice. To be independent in offering investment advice you need to prove you have researched all of the market: products (simple pensions including stakeholders and SIPPs), ISA wrappers, Portofolio wrapers (or platforms), investment bonds (insured funds and open architecture) and all possible investments: unit trusts/OEICs, investment trusts, structured products, PRIPs, REITs, ETF, ETC, ETN etc.

    You don't need to do this research for every client but you need to prove you have done some research. The best way is to employ a researcher or to buy the service of a researcher.

    Ther would be very few IFAs who don't have HNW and/or sophisticated clients and they may not need to research ETF, unit trusts, ETC, ETN and probably investment trusts etc.

    There are lots of firms which believe they can remain independent by using one platform and 5 to 11 model portfolios. That's not true.

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  • Eugen

    I agreed with most of your comments but right at the end you said something I disagree with:

    There are lots of firms which believe they can remain independent by using one platform and 5 to 11 model portfolios. That's not true.

    I can see how you could come to that conclusion, but if having done your research into all possible products you then construct model portfolios that is acceptable. There are some firms that find themselves advising a niche type of client whose only differences are the degree of risk they are willing to take. Thus you could exclude investments that you consider too risky for the type of clients you advise.

    The rules don't suggest that you have to research and prepare a unique portfolio for each client, just be aware that some investments that may be unsuitable for one type of client, might be suitable for another.

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  • Have you ever read "who stole my cheese" ? If haven't you should it might help you adjust to these changes. Unfortunately for a number of years consumers have been ripped off by Banks and IFAs motivated by commission earnings and not best advice. In the case of the IFAs it may have been only a small number but nevertheless the industry itself took too few steps to address this. Now you find RDR forced upon you and many IFAs will have to change their approach to building relationships with their customers, firstly by demonstrating that their advice is valuable and worth paying for. As for the guy quibbling about tougher exams let's hope he's out of the industry come RDR.

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  • I think you'll find Nationwide have a panel of funds they can select from L&G/Cofunds see: http://www.nationwide.co.uk/investments/isa-unit-trust/fund_range.htm
    And on their website you can see they charge around 3% initial charge - so I think it comes down to Knowing your client...

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