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Chris Gilchrist: Adviser charging is more than a name game

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A change as profound as adviser charging was always likely to cause some adviser firms to avoid it by pretence. They simply kept commission scales and called them fees. The FCA has clocked this, but it won’t be easy to deal with.

I’m pleased to see that Nick Bamford has acknowledged the validity of what I wrote here last year: “The actual costs of implementation today are a negligible part of the overall costs of the advice process. By far the greatest cost is the adviser’s time. Charging methods that deny this basic reality probably won’t survive the test of a marketplace where clients compare the real cash costs of advice.”

Informed Choice’s new fee structure loads more of the cost on to initial advice. Advisers who are sticking to percentage charges use some pretty weak arguments to defend them. Such as:

”The business risk increases with the sum invested.” Perhaps. But if you apportioned the firm’s PI premium on a loaded basis, with larger investments bearing higher cost, how much would this represent per client? In cash terms it would be peanuts in relation to the average fee bill.

”Clients like percentages.” Clients only like percentages because they are small numbers. As soon as you spell out that 3 per cent of £200,000 is £6,000 they don’t like it at all. So all you are saying is that it’s easier to get away with large fees if they are expressed as percentages.

”You need to charge enough to make up for unpaid-for work.” Many advisers believe this justifies high percentage charges. That’s because they haven’t got the service proposition or the courage to tell clients exactly what they will pay even if they don’t implement the advice they have paid for. In other words, they’re still thinking like salespeople rather than professional advisers.

We haven’t yet entered the new world where clients are aware of typical costs of advice in cash terms. And many advisers aren’t at all keen for it to happen. I also think the regulators haven’t yet understood the elephant steak issue. By this I mean that dividing charges into smaller bits makes it easy to charge the client more. Architects have always done this, so professionalism does not win you a cigar.

For example, an exploration or fact-find fee, an advice fee and an implementation fee – and perhaps not all advisers specify them all exactly at the outset of the process. There is plenty of scope to evade the spirit of adviser charging. Regulators and financial journalists need to do a bit more digging than they have done to date.

Part of the problem is that the FCA doesn’t want to get prescriptive about a lot of this stuff. And it’s probably right. But the professional bodies – to whom the FCA has outsourced the regulation of advisers’ professional competence –  don’t have the authority to police charging methods.

I think the FCA will soon have to decide whether to get more prescriptive or to delegate this bit of the job to the professional bodies as well. I can tell the FCA’s PR department now: it will not be long before we have mischarging scandals reported in the press . Yet the guilty advisers will probably have remained within the letter of the adviser charging rules.

Better get some excuses ready for the boss now.

Chris Gilchrist is director of Fiveways Financial Planning, the author of the Taxbriefs adviser guide The Process of Financial Planning and edits The IRS Report

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Comments

There are 21 comments at the moment, we would love to hear your opinion too.

  1. Chris- I am fed up with people trying to tell me how to run my business.

    Its a free market, that’s capitalism, if a client doesn’t want to pay me the way I want to be paid then I’m quite happy for them to go elsewhere.

    Whether its a percentage, flat fee, hourly rate, retainer or coffee beans ITS GOT NOTHING TO DO WITH YOU HOW I RUN MY BUSINESS

  2. I think it’s folks like you and Mr Bamford who have confused themselves and clients so much over the last few decades trying to be clever we now have this situation.

    No other industry wants or needs such a confusing pricing structure.

    It’s just a cost to the client either one off or ongoing.

    My accountant doesn’t break down his costs, meeting, preparing accounts, advice, tax advice, printing accounts. Etc.

    It’s an exercise in trying to justify excessive charges and ridiculous ongoing charges.

    Get a grip.

  3. So 20 years to get his pricing right? I assume Bamford didn’t charge fees in the 90s when he flogged 1000s of endowments and FSAVCS?

  4. “it will not be long before we have mischarging scandals reported in the press.”

    Really? I’d thought the FSA’s main concern about intermediary charging was bank salespeople telling customers that their “advice” is free (often accompanied by a dark warning that going to an IFA will mean having to pay fees) but then taking 7% (or more) initial sale commission (and no trail to pay for any subsequent servicing). This may have been reported in the public press, though I for one have no recollection of any such reports, particularly as far as IFA’s are concerned. This is why the banks continued to operate just such a model right up to the introduction of mandatory AC.

    I just don’t see why some people have such an issue with intermediaries working to a nominal (but negotiable) benchmark of 3% + a half, whether by commission or now AC. It’s worked perfectly well for decades and is a wheel that simply isn’t in need of reinvention. Are these what Mr Gilchrist considers to be “high percentage charges”?

    At what stages of the FactFinding/Risk Profiling/Advice formulation/Implementation process the intermediary decides to bill his client is surely a matter of commercial judgement on which intermediaries should be left to exercise their own discretion.

    Sadly, the regulator seems, on one hand, to be intent on removing all freedoms of commercial judgement whilst, on the other, ramping up the burdens and costs of regulation ad infinitum. Before much longer, every aspect of what we do will be shackled by regulatory diktat.

    Fiveways’ charging scales (but not its billing policy) may be viewed at http://www.fivewaysfp.co.uk/fee-bands/. The bottom end of Fiveways charging scale for advising on and arranging an ISA (£350) looks to me to be suspiciously proximate to 3% (of £11,520).

    “Fees are exclusive of VAT (which will not normally be applicable)” So if, in most cases, VAT isn’t chargeable, this looks very much like a “leading to the implementation of product” charging model as opposed to pure advice.

    Draw your own conclusions.

  5. 2 recent articles from you. One as poor as the other.

    Stop trolling for a cause which is embedded in cloud cuckoo-land and leave the industry’s well-qualified and diligent business owners to determine their own best way to grapple with the new structure which has been implemented.

    Who made you judge and jury? Not me, that’s for sure!

  6. Hi Mark

    A very odd post comment. Are you feeling unwell?!

  7. Informed choice charge a percentage servicing fee, don’t they? If they think fixed fees are more ethical then why not use the across the board? Not doing so seems hypocritical don’t you think? I don’t care if you example it in cash terms as well, it is still a percentage just like most everyone else, so come off the high horse please.

  8. We had a very constructive meeting with the FSA some time back basically to make sure we were doing what would be required post RDR.

    Amongst other things we asked whether they had a problem with percentage fees. The answer – no problem at all as long as the client understands in cash terms what they are paying and what they will get (initially and on-going) for the charge.

    Our letters say the charge will be x% being £y which will be deducted from the investment you are making before the balance of £z is invested. We explain the on-going fee in the same way.

    Where is the problem????

  9. “In other words, they’re still thinking like salespeople rather than professional advisers”
    Are you saying there is something wrong with salespeople? are they, as a group, unprofessional, untrustworthy and unable to conduct an honest deal? If so you cannot possibly ever have bought a new sofa, a new car or gone to a travel agent to book a holiday. Personally, I have just had dealings with a very professional young man who has sold me a much needed piece of office equipment. Did I look down my nose at him because he tried to sell me something which is beneficial to me, rather than simply advise me on the need?
    Get real and get over yourself. Julian Stevens, as ever, is correct. Your charging structure, whichever way you like to dress it up is 3% or thereabouts, end of.

  10. @Patrick Schan

    We charge fixed monetary fees for advice and implementation. We charge review fees expressed as a percentage so that the performance of any of our clients funds and our remuneration are aligned. We think that is a pretty ethical way of doing things.

    We are always happy to share how we do things (and take the inevitable negative feedback!) but we are never saying this is the only way to do things. We are always entertained though by the delicate nature of some IFAs who think that any discussion about price is a criticism of their way of doing things- it isn’t it is just an opinion neither wrong or right

  11. @lol

    Just invested £40,500 for a client at a fixed fee of £250. Not sure how you arrive at the conclusion that “whichever way you like to dress it up it is 3% or thereabouts, end of”

    Although I agree had they invested £8,333 it would have been 3%

  12. Commission was a turd, initial and trail is a chocolate covered turd.

    There must be a better way to charge IMHO.

    The unlinking of price / investment would be the first step.

  13. @ Nick
    I was not addressing you.
    I could not give a toss what you charge. That is your business.

  14. Nick Bamford

    I thought you de-authorised and weren’t authorised and regulated to give advice anymore – Is that why you are SOO cheap ?

    Careful old son !

  15. @ Chris

    In your citywire profile of Fiveways on 06/07 2012 you say you charge an ongoing fee of 1% is this still the case.

  16. I am pretty sure that RDR wasnt about how much was being charged rather to remove alleged product bias.

  17. @ Chris
    Come on give Reaper an answer.

  18. If you look on his website he doesn’t charge fees in the truest sense.

    He has a range of fees for the size of the investment and also charges 1% p.a.

    So how he can preach to others I do not know.

  19. man on the moonviser 11th September 2013 at 9:55 am

    What other business sector self consumes itself as much as this one?

    Nope, can’t think of it either.

    People pay for things – last time I noticed homeless people were not being housed for free by Private landlords. Now that is a scandal but we dance on the head of the advisor charging system enforced by a defunct regulator.

    Oh look at me, I am so professional and I don’t charge at all or look at me my minimum client fee is £5k per annum. Interesting?

  20. Adviser charging is part of the regulations that govern financial advice. Those rules were necessary because too many advisers ripped their clients off in the past.
    My argument is that if you are providing a service then you need to charge for it consistently. If you feel you can do that with percentages for initial advice, carry on. In the end the consumer will decide.
    Like Informed Choice, FiveWays’ annual service fee is a percentage (in our case 1%) of assets under advice. This is disclosed to clients as a £ amount. We explain to clients why we do this and that it aligns our interests with theirs.
    Would somone like to explain how initial advice as a percentage of invested capital aligns the adviser’s and client’s interests?

  21. headbelowthe parapet 14th September 2013 at 6:34 pm

    Chris, I always enjoy your articles, and this one is no exception.

    But, there are no hard and fast rules (or diktats) when it comes to charging for our services.
    Why is it wrong to charge an initial advice fee (which in the real world is almost exclusively linked to implementation) as a percentage of an investment? Particularly when the business model has worked successfully (and exclusively) on this basis in the recent past.

    Change is a difficult beast to tame – more especially so when the beast in question has a multitude of heads.

    Taking baby steps towards the panacea of professionalism seems, to me at least, like a sensible plan. It seems as if you (loosely) believe this too – using ‘alignment of interest’ as a justification and argument for a percentage fee, whether that be initially or annually is as flawed as any other.

    I believe Kahneman might describe this as the framing effect and blame it on confirmation bias – but we’re only human. To paraphrase Fagin – I think you’d better think it out again.

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