Are stakeholder pensions the thin end of the wedge for IFA businesses? Certainly, the indications are that reduced commi ssion levels on pensions will lead to reductions on other financial products. This could certainly lead to the demise of IFAs if they are not willing to change.
The majority of IFAs rely on commission from product sales to finance their business and their own financial security. The success of the IFA's business depends on how good a salesman they are.
They spend time advising clients and making recommendations. But if the client decides not to proceed, they will fall at the last hurdle.
The client gets the benefit of professional advice and service, yet the IFA earns no income and, worse still, incurs a loss in this unprofitable relationship. It is not surprising that an unhealthy number of small IFAs are undercapital ised and achieve ridiculously low levels of turnover.
How can such IFAs deal with the onslaught of stakeholder pensions which thr eaten to drive down their income even further?
But thank goodness for stakeholder – a master stroke by the Government. Whether intended or not, the new initiative will draw a clear distin ction between low-cost products and high-value advice.
Since the maximum 1 per cent charge for stakeholder pensions does not factor in the cost of advice, this presents the insurance industry with the opportunity to transform itself into the financial services profession. The way this will be ach ieved is by highlighting the value of professional financial advice.
For IFAs to survive in the 1 per cent climate, the answer is simple – stop giving free advice and start charging fees.
If the IFA does not do so, his time will be spent dealing unpro fitably with low-quality clients and arranging lowincome stakeholder plans, putting his business under more pressure until there is no point continuing. Why would the IFA want to do such a thing?
The sad fact is that many small IFAs are not sufficiently solvent and, if indemnity commission is withdrawn, they will fail to survive.
Being fee-based means the IFA sells advice, not products. The IFA charges a fee for the adv ice and services he provi des, whether or not the client buys a product. Terms of business can be altered to guarantee that every client is profitable and the IFA does not have to rely on selling a product. If the client does buy a product, the IFA can use the com mission to reduce the fees due. This way, he gets paid for all the work he does.
This way of doing business means it is easier to demonstrate your independence to your clients, your credibility with professional introducers is enhanced, the reduction in stakeholder commission will not affect you unduly and the value of your practice will rise substantially in the future because there is committed ongoing income irrespective of product sales.
So why don't more IFAs become fee-based? Many are frightened to change because they think being fee-based means they will earn less than a commission-only adviser and will lose clients.
But being fee-based means you receive fees and commission, not fees or commission. Many clients will prefer to pay for your advice by using commission to abate the fees due. Any surplus above the fees due can be held on acc ount against future chargeable work.
You must implement the following:
Charge retainers to clients to meet the ongoing cost of providing advice, service and annual reviews.
Do not give away free financial advice. There are no free lunches. Charge for your time and advice.
Be selective. You do not need thousands of clients. Around 200 good-quality, fee-paying clients will ensure a pro fitable practice. Turn down timewasters and prospects who do not meet the criteria to be one of your clients. You are not a charity.
You must deliver added value to your clients. They will not pay you if they see no benefit.
Explain to your clients why you are fee-based and the benefits the client will derive.
If you do these things, you will earn more than a commission-only adviser.
Will you lose clients if you change to working on a fee basis? Absolutely. Will they be the quality clients? No, bec ause such clients will appreciate the value you deliver and will have the funds to pay for your services.
The clients you lose will be the timewasters who get you to do quotations but never do any business and freeloaders who do not think you should get paid for the time you spend with them.
Do you want such clients? I think not.
“But my clients won't pay fees,” you argue. Why not? Don't you deliver a professional and personal service? If they will not pay fees, it is because they do not value the services you provide or they do not have the money to pay for your services.
If they do not value what you do, explain how you can make a difference to their fin ancial planning and enh ance their position. If they do not want such a valuable relationship or still will not pay you – fire them. You cannot spend time with people who do not value what you have to offer.
If they do not have the money to use your services, then they really should not be clients in the first place. You will not achieve any valuable business from such clients and it is better that you flush them out as they will only be a drain on your business.
Such individuals are the low-income candidates for whom stakeholder was des igned. Leave them to their decision trees or commission-only advisers or big specialist IFAs which can handle high-volume, low-margin business.
So fee-based or commission-only? I guarantee that if you become fee-based, you will earn more, have more fun with interesting clients and ensure your own financial sec urity. You will set yourself apart and increase your credibility.