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A decent price for advice

mm ianmckennaside
Ian McKenna is director of the Finance & Technology Research Centre

Recent suggestions that the FSA might introduce decency limits of 3 per cent for initial adviser-charging and 0.5 per cent per annum for ongoing advice were met with horror by many in the market.

It is not hard to see that, if enforced, this would remove any possibility of it being economic for advisers to look after the interests of everyday consumers. In practice, I think it would eliminate any adviser distribution of individual life and pension products.

Life and pension business is currently too manual a process to operate on those margins and advised investments would inevitably all be written via platforms for the reasons outlined below.

This suggestion, which did not appear to emanate officially from the FSA, has the hallmark of pre-Budget rumours, where governments float the idea of really bad news so the electorate is relieved when actual tax changes are not quite so bad. I suspect the FSA is softening us all up for something it will be really important to resist.

This does, however, raise a pertinent question. What is the right price for advice after the RDR?

This is actually an exercise my office has been working on for some time. Although we only have preliminary findings at present, given this issue has become topical, it is worth sharing our results so far.

As anyone with any experience in the adviser world will understand – although, sadly, it would appear many at the FSA cannot grasp – the cost of carrying out exactly the same transaction between different product providers varies dramatically due to variations in service levels.

If a life office is still actively looking for new business, chances are you can expect a reasonable level of service. For those who have made a significant investment in e-commerce, you might be able to keep your advice costs below 1 per cent. If the provider is a closed book, however, our investigations suggest the costs could be considerably more.

Ultimately, the objective of this work is to build up a detailed picture, ideally provider by provider, contract by contract, of what the typical cost of ongoing servicing contracts ought to be. This, in turn, should provide solid evidence that can be shared with the FSA and others to inform any planned limits on decency rates.

In measuring the true cost of advice, surely an IFA needs to charge for each and every action in the process of advising the client. And this is where the problems begin.

The administration service from many life companies is so poor that if the IFA passes on all the costs it has incurred in obtaining the information necessary to provide advice, the cost to the consumer becomes prohibitive.

Our cost analysis has been achieved by working with advisers to map in detail all the activity in respect of different types of contract and then compare the adviser’s operating costs to understand the profit or loss in each individual contract.

Although only at the early stages of our research, we are beginning to see evidence that the true cost of advice to consumers should be as high as 1.8 per cent of the assets under advice where providers employ the most Dickensian of processes and, sadly, many fall into this category.

There seems to be a real lack of understanding among the life insurance provider community that today’s advisers and their clients have viable economic alternatives to business methods more akin to the 1950s than 2010.

The platforms that have emerged over the last decade represent a far more cost-efficient method of managing clients’ assets.

One could argue that where advice costs are above a certain level, those assets should be excluded from the advice process. This sounds fine until something goes wrong. Even Standard Life managed to create a cash fund that was considerably more volatile than expected. Is it not prudent to keep a far closer eye on exactly what is going on under the covers of closed-book investment products?

At a time when the platform community can easily provide the requisite level of detail to advisers on all their clients, on a daily basis if necessary, the life and pension providers are still struggling to make a messaging system that provides data on individual contracts on request and operates in a scalable fashion.

The process known as contract enquiry was designed to meet adviser requirements a decade ago,and even this has really only been widely adopted by a forward-thinking handful of life companies.

For those with closed books, the operating method seems to be to give the customer as little information as possible and, if they appoint an adviser, to make it as difficult as possible to obtain the necessary details to offer advice to a modern standard.

It is now my opinion that there is very little time left for those life companies that are not prepared to see at least two-thirds of the investments they hold migrate away to radically raise their game. It is time to recognise that for life companies to go head to head with platforms, there is a need for an entirely new servicing and support model – one that provides access to a far wider range of data on investments automatically and probably on a regular basis.

Through this research process, we plan to identify objectively those providers with which the real cost of doing business is too high. At the same time, we want to help advisers form a clear view of what the fair cost of advice should be to their clients. This must be essential for the ongoing financial stability of the adviser community.

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. Exasperated me 14th May 2010 at 9:06 am

    The correct price is whatever is required to do the job, not what the reguators or their political masters dictate and certainly not what some IFAs charge.

  2. John Blackmore 14th May 2010 at 9:33 am

    Perhaps if advisers gave more thought to the “services” they offered 0.5% pa trail might make a healthy profit ?

    We are now in danger of moving from commission bias to fee bias – where activity for its own sake becomes the order of the day.

    Doing things just to convince clients that they are getting value for their money is a well known business strategy but don’t be surprised if the regulator questions the value of some of the activities that cost so much.

  3. Gillian Cardy 14th May 2010 at 9:43 am

    How interesting!! Presumably a technology expert has an opinion on “the right price” for a computer or a piece of software?? Presumably Jeremy Clarkson has an opinion on “the right price” for a car??
    It’s simple. Work out the underlying cost of product or service delivery. This is the price below which you cannot go. Then add your margin.
    If clients will pay, that’s a result.
    If not, go back to the drawing board and work out whether you change the costs of product or service delivery, or your selected margin, or both.
    By the way, for one and two man firms the answer for the first part is rarely in excess of £50 per hour … so when firms pluck a figure of £250 out of the air please do not take that as “the right price for advice” – any more than you’d believe that the price for a Maserati Quattroporte represents the true cost of car manufacturing.

  4. to: Gillian Cardy

    Please don’t take this the wrong way, I know you think I shout at people.

    How does the number of men (or women) in the firm dictate how much the advice should cost? I know one man bands who do a far better job than large firms and the only reason they want to work alone is because they can’t trust other advisers who may wish to work with them, I can’t blame them.

    Opinions such as this cause problems for ALL firms so perhaps when there is no justification (or evidence) for such a sweeping statement people should abstain form publishing something that the regulators will (WILL) feed upon.

    You are a well respected and, some might say, influential person so please remember that what we must take care with what we say on here.

  5. Gill – whist I take you very seriously indeed, as Evan asks, do expand on your £50ph 1.2 man business model.

    Are you saying that someone with 30 years experience, chartered and certified running his own 1 man band firm (with no staff) should not charge more than £50ph?

    And for a chap with 5 years’ experience working for KPMG….should charge £200ph for the same work? Thats ok?

    Do explain what you mean be that.

  6. Price is just one factor to consider. I think a much more important factor is value.

    That said Ian makes an important point which is that some pricing methodologies can have have the effect of pricing some consumers out of a market.

    But don’t worry because alternative distribution methods for advice and implementation will emerge if pricing designed for the HNW type of client makes it less easy for the mass market to access advice (and I don’t by the way mean the Banks)

    The main distribution route in the future for basic financial advice and products will be the internet. I fully appreciate that may not be something that sits comfortably with the majority of IFAs and we will hear comments like “it hasn’t worked yet” and “people need to be sold these products” but I would be very careful not to deny the power of the internet

  7. Gillian Cardy 14th May 2010 at 4:20 pm

    An explanation is requested, so apologies for lack of clarity (though I think Evan and Harry are reading things that aren’t there!!).
    I did not say that the number of people in the firm “dictates” the costs of advice. I merely observed that in 1 – 2 person firms (a significant part of the IFA community and the one of which I have the most experience) this appears to be a typical “cost of production” i.e. the costs (overheads) of being in business which must be met in order to stay in business.
    Incidentally, I think everyone should know this figure even if in the end they opt for an AUM or fixed fee pricing structure, if only so they can keep an eye on costs and time in relation to work undertaken and income earned.
    There is a powerful case for being a sole adviser with a very capable administrator – I doubled turnover from £75k to £150k p.a. without doubling costs when I moved from sole trader and employed one adminstrator (when I was charging £95 per hour).
    The leverage of income compared to the cost of employment is significant – and does not require a firm to trust other advisers (a position with which I have a great deal of sympathy as it happens).
    Neither did I link costs to quality. Quality could be one of the big reasons for the markup over the cost of production. Desired profit level is another.
    I certainly did not assert (and never have) what someone SHOULD charge, any more than I can assert what price PCs or cars SHOULD be sold at.
    I was actually responding to the first comment about “the price to do the job” and the link with “what some IFAs charge”.
    I am deeply disturbed by the blithe mention of high charge out rates and total fees which are frankly way beyond the means of most clients of many IFAs.
    If I am influential at all, I hope it has been in the field of fee-based advice for the mass affluent – charging £95 per hour when I started out in 1998 (AFPC qualified) increasing to £150 after winning Financial Planner of the Year and getting to Certified and Chartered.
    I’m not sure what bit of my comment I shouldn’t want the FSA to read but what I DO want people to read (and believe) is that it IS possible to create a fee based proposition under the Adviser Charging regime that average (i.e. not high net worth) people will pay for.

  8. Re Gillian Cardys stupid comments £50.00ph. MINUS All costs associated with giving advice including software, Admin Support, stationery, telephone, office rental or ownership together with PI insurance, compliance, fscs and on and on and ad naseum = Do not even bother.A Plumber or electrician would charge more than that for a call out charge before doing ANY work. Why do people like you make such stupid ill thought out remarks as if you have even the remotest idea of what is involved in running a small business? what do YOU charge a small firm for consultancy work? Take £50.00 & multiply it by xxxxxx . How on earth are you going to charge consultancy fees to small firms who earn £50.00 ph?

  9. The points about what is the value of advice to consumers are well made. One of the main things that has come across from our work on this to date is that many firms are simply not working out the cost of the efforts they are making on clients behalf, especially as a result of the variable quality of service from providers.

    I would entirely support the need to identify how to deliver value for money to the client. No great surprise I am sure if I say that I will be continuing on how to achieve this and how technology can help in future columns.

  10. I think the main issue here is the FSA trying to force us to run our businesses like solicitors and accountants.

    The problem with this is approach is that it ignores the fact that a solicitor/accountant does not have an ongoing servicing cost throughout the year dealing with provider correspondence etc.

    Whenever a solicitor or accountant receives correspondence for a client it is charged on a time cost basis. If we did this the costs to the man on the street would soon mount up – forcing even more clients to the banks.

  11. That is a very good point from Sean. The ongoing service where nothing is being charegd for it, or just trail received is one of the problems, especially when we have an infinate requirement to defend stale claims because of no longstop which will NOT have been costed in to the original advice or servicing on most advisers advice until about 2005 as most of us didn’t know until round about then that we’d been stitched up with the FSMA removing mention of the lobngstop from the rule book.
    Re Ian’s mention of possioble FSA decency limits, my reading of that was that it was not to be a level over which charges cOULD not be deducted, just that it was at a level that the FSA would want a provider to flag to the FSA for a betetr look at how the charge is being justified. Also the figures I ehard banded about were not the 3% plus 0.5% that my firm tries where possible to work on, but the 10% plus 0.75% or higher.
    With regard Gills comments, the cost of the advice is not the problem when looking at hourly rates for the actual advice, it is the additional costs which rack up, especially for one adviser firms where if you have admin staff, you then get hit vfor initial licence costs on software which are disproportionately high for one adviser firms, just as F-pack fees are and so on. I suspect my turnover is quite good for your average IFA, but my profit is probably significantly worse than a 3 adviser firm, but that appears the price for autonomy.

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