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Simon Webster: Clients will pay fees if you demonstrate your worth

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Last week, an adviser told me: “A client will not pay me £500 to tell him to put £500 a month into a pension.” I am sure the adviser is correct but with many advisers already successfully charging a fee for recommendations to make monthly payments into investment products, why do others find it so challenging?

For much of my 30-year career I have been remunerated on commission only. But over the last 10 years as commission rates have steadily fallen, particularly in the pension arena, we started charging fees.

From 2013, there will be no commission on investment business so devising a systematic fee-charging model is a priority. Moving from ad hoc fee-charging to a full-blown system requires serious thought, however.

We have made a number of informal attempts to market-test different fee structures and have started to recognise some trends.

Our clients have no objection to paying us properly for decent advice and service but good service is essential. It is vital that we make sure our definition of good service and the client’s coincide upfront.

The principal product we sell is advice and our principal cost is time. We add value for the client but, in doing so, we take on liability. What we charge must cover time and liability but should also reflect the full value we add.

I recently received a liquidator’s report from PwC where the senior partner was charged at £460 per hour and junior accountants at £230 or more, all plus VAT. On that basis, my starting point of £195 per hour not subject to VAT looks pretty reasonable, based on wages cost, overhead, liability allocation and an element of value. I charge my admin team at £75 per hour on much the same basis.

We then need a route to market, so it is important to think about positioning. Once we understand why solving a particular problem is important to the client we can try to make sure we really do solve the problem and we can also make sure we demonstrate that in solving that problem we have really added value. This underpins the justification for our fee.

When we offer our fee proposal, we can couch it in terms that relate to the client’s problem and to the value we create in fully identifying the problem then planning for and implementing the solution.

These are three discrete tasks. Sometimes the client will know the problem but have no idea how to plan or implement and sometimes he will not even know the problem. But each of these three key adviser roles has a value and each ought to command a price.

I quite like the idea of being able to charge every client that walks through the door.

Simon Webster is managing director of Facts & Figures

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Readers' comments (22)

  • Feel free to correct me if I'm wrong, but my impression is that a very significant majority of IFA's dealing with mostly non-HNW individuals find it very difficult to persuade them to pay fees for advice on most of the subject areas on which our knowledge lies.

    Pensions? I need hardly set out all the reasons for the public's general antipathy towards just about anything to do with (private sector) pensions, and the government's doing nothing to improve things either. Investments? Confidence in investment markets (rightly or wrongly) is currently in tatters. Life Insurance? Cheaper online or via Tesco. Income Protection? Too flipping expensive. IHT? Don't like the idea of the tax, but not prepared to spend any money on dealing with the issue.

    So what are you going to do Mr Client? Ermmm ~ I'll think about it and get back to you. That's the reality of proposing fees to most people of ordinary means. And people working in the public sector are the most difficult of all to persuade that advice = fees.

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  • R.E. Nick's comment - £8ph is still higher than a fair few jobs are paying...are there going to be enough HNW clients to go around?

    A smart move would be to supplement financial advice (clients generally decreasing in number) with a sideline of debt advice (unlimited supply of desperate clients). But then, they're going to be even less likely to afford the fees...

    Best to wait for government to nationalise the whole financial advice sector and recruit all IFA's into the Money Advice Service - at least there'll be free mugs, pens and mousemats. Probably.

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  • The RDR does not require any consumer to pay fees by cheque/from their net pay for financial advice.

    Adviser charging, where the cost of advice is deducted from a financial product and agreed between adviser and client replaces commission determined by the product provider. This means that an IFA who post RDR wants to deliver advice, but only get paid if the client buys a financial product, (just like now for many advisers via commission) may continue to do so.

    Of course the abolition of factoring for adviser charging (the key mistake made by the regulator in this change) makes this more difficult for regular investment products but not impossible.

    I never thought that commission introduced product bias (and not much provider bias either) but let’s not make adviser charging out to be difficult because it isn’t. And let’s not make it out to mean clients having to pay fees because it’s not that either.

    @Nick 4.00 Question- How does your client on £8 per hour pay for advice now?

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  • Nomatter the model, there will always be people who lose out on their investments. Joe Public is not going to want to pay an up front fee without the reassurance that what they are doing is a cast iron guarantee for a decent return. Who is going to be able to offer that? People with less wealth can't afford to wait 5-10yrs to see if what they've done is good for them. "Trust me I'm a financial adviser" isn't going to wash with a lot of people.

    I'm pretty sure if remuneration was paid based on actual return on investment then people wouldn't have an issue. However, paying an up front fee for the possibility of a return is a bit harder to swallow.

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  • OK guys, why not take a step back and look at the business case as for why factored commission is not a good remuneration model and perhaps why clients earning £8 an hour are not good clients for a professional financial planning practice. I know someone will shoot me down but I am not denigrating low earners or historic business models. God knows that after over 25 years of doing it, I wish I changed my model about 24 and a half years ago!

    Look for example at how much energy, resource and risk goes into arranging some life cover for a low earning client. The business goes on risk, commission is paid and the 4 year indemnity period kicks in. Client loses his job, looks at his DDM's and the first thing that gets cancelled is the life or PHI/CIC policy.

    Great, about 20 hour's work and you end up paying a clawback, and all the fee offset through commission clauses in your terms of engagement are not worth a stuff as the client is skint.

    But go a step further, as a professional financial planner, especially if independent and thus working for your client, why does needing to rely on selling a product in order to be paid for the work done represent a good business model. This must create a conflict apart from not being a great return for capital employed, risk, hours of learning and knowledge and skill imparted.

    If one wishes to do charity work, do it freely on a pro-bono basis. If the game is to sell and sell product tbecause there is a need to create income then independent planning is not the game in town.

    The product providers who devised indemnity commission in the late 70's/early 80's probably thought it was a great marketing idea. They'll stuff you now with the land grab over assets under management.

    Engage with your real clients, it may be hard initially drom a commercial perspective but we've been living in a bubble where the need for selling product and absurd commission levels have distorted the advisory process.

    Leave RDR aside, it's time to move on and I agree with Simon's comments. We did it 6 years ago and it's not easy, but it is worthwhile.

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  • mr Branford your definition of adviser charging is fundamentally flawed. Adviser Charging does not require you to take the charge from the product , it would work with a cheque.

    This article was a statement of the obvious, show value and expect to be paid. Unfortunately for the Product bashers in this forum it's a bridge too far. To all you , happy extinction and from a customer perspective ...good riddance!

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  • Simon is right and Duncan Carter sums it up perfectly.

    For the rest of the half wits who disagree with the obvious, just get this:

    Clients on £25k a year, or earning £8ph DON'T NEED COMPLEX FINANCIAL ADVICE.

    Is it really hard to get that into your heads?

    No, you don't need complex financial advice for a life assurance or income protection contract. For it's worth, why pay someone to clarify definitions and exclusions. Products will be simplified - if you're ill, or die, you will be paid an amount.

    So what Duncan says is true. The highly qualified advisers knowledge will mainly benefit those on higher incomes. That's that.

    Get this simple thing into your heads and move on, or, move out.

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  • Umm Harry!

    Clients who earn £25k a year very much need advice..Just probably not the sort of advice that you prefer to give I guess! Dear oh dear!!

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  • Interesting !!

    I have been working a fee based service for about the past 4/5 years, in the main a mixture of retainers and fees.

    One thing you have alluded to mention is how many clients have you lost ? I know from personal analysis my count stands at around 80% of my client base.

    One thing that has allowed me to continue business with the 80% that will not pay fees is being able to transact on a comission basis.

    One thing we all need to sure of is, that their are those who get it and those who dont !!

    I have not come across 1 client who thinks they get a free service or we do not get paid for recommending a product, the point is we should be able to offer the client a choice which is now being denied !!!

    One simple fact that makes RDR a massive failure!!!

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  • @MAS and nest rule please re- read (why are you so frightened to enter into a debate where you publish your name?) I simply said it could be paid from the product. What you describe where the client pays by cheque is called a fee.

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