Iwas motivated to write this piece by Alan Lakey’s article in last week’s Money Marketing where he posed the very important question about how he might be paid for the huge effort he had put into providing advice for a pension client.
I am not going to be drawn into a debate about the merits or otherwise of a fee or commission-based approach to the provision of financial advice and products in this article but instead concentrate on why I believe that clients will pay fees for financial advice. Certainly, it has been my experience that clients will pay fees and many actively wish to do this.
What I do agree with is that clients will not pay fees where there has been no articulation of a value proposition by the adviser, where the fee being charged is simply a reflection of the commission amount that would have been paid if they had been sold a product or where the fee rate has been simply plucked from mid air, like simply taking an hourly rate from the model key facts document previously produced by the FSA.
We are told that survey results often confirm that clients do not want to pay fees but I suspect that the way these surveys are carried out and the way the question is asked often leads to a self-fulfilling answer.
Of course, clients will not want to pay fees if they have been misled into believing that financial advice is somehow free or that commission is a no-cost option.
We have for some time taken a stance that we want to be paid for our professional services and that there should be certainty about that payment.
We have adopted a twin approach to pricing. The first we call unbundling and the second is the removal of cross-subsidy. In the latter case, we have removed cross-subsidy between clients and cross-subsidy between client activities.
Our process has four steps which we call Eair – engagement, advice, implementation and review.
Engagement is the process by which we handle the first client contact through the know your customer process before moving on to determining what we are going to do for the client and how much we are going to charge. The first meeting is a no-cost, no-obligation meeting where clients can decide if we are the right type of adviser for them and we can discover exactly what we can do for them as well as getting under their skins as far as their goals and objectives are concerned.
We will not attend a first meeting where the client has not completed the welcome process and we use it as a filter to weed out those who are not serious about seeking advice or those for whom we might add little value.
Advice is where we believe we add most value to our clients’
lives. Our experience is that they are ready, willing and able to pay for meaningful, well communicated strategic and holistic advice. This is provided through a written report which is presented to the client offering them the opportunity to ask further questions and seek clarification. We charge a fixed project fee for this work so that the client knows exactly how much they are going to pay in advance. We have a superb piece of software designed in house that enables us to calculate competitive and profitable fees for this activity.
Advice can but does not have to lead to implementation. This is where we have unbundled. Clients come to us knowing they are not going to be sold something (other than impartial professional advice) and our offering is free from the sales pitch. If a client wants us to implement a product or change an existing arrangement, we are happy to do so and we will charge a fee for doing so.
Our advice will enable those who can to go off and implement a plan for themselves if they wish to do so. Where commission is payable, we will use that either to enhance the product, part or wholly pay our implementation fee or, in extreme situations, rebate it to the client. Either way, we have been very early adopters of a pure form of customer-agreed remuneration.
We offer four distinct review services depending on the requirements of the client. We charge for these review services and the more intense review package includes a quarterly valuation of pension and investments coupled with half-yearly or yearly formal reviews. These are supported by newsletters, both hard copy and electronic, as well as access to our ever evolving website and, indeed, access to the adviser.
As each stage is separately charged, we can remove the cross-subsidy that exists in a bundled approach between client activity. As each client is charged for the services they receive, we can remove cross-subsidy between clients. As all business people know, another expression that can be used for cross- subsidy is reduced profits.
Our pricing mechanism involves another acronym known as Verp. Verp stands for value, expertise, risk and profit. In pricing our services, we need to consider each of these elements.
The sad fact is that implementation can still be more expensive than advice simply because the financial services structure still focuses on implementation as being the most important and risky part of the process.
If you think about the way FSA, Financial Ombudsman Service, Financial Services Compensation Scheme and the professional indemnity insurance market look at what we do, the main point of contact is where implementation takes place. So a big part of our pricing for implementation is the risk part.
Bringing this process together has resulted in a very high take-up of our services. Most clients sign and return the engagement letter within a few weeks of the first meeting. Very few object to the fee levels we propose. In fact, the evidence I see of this is in the number of clients who try to pay the advice fee ahead of an invoice being issued to them. Many go on to require the complete process of advice through implementation and on to review.
All of them buy into the impartial way in which this is delivered. None of them ever feels under any pressure to buy a product.
Clients will, indeed, pay for financial advice. If they will not, that is not their fault, it is ours.