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Chris Gilchrist: Advisers must be more transparent with fees

Chris Gilchrist MM blog

As far as consumers are concerned, the two most important bits of the RDR are that advisers charge fees and that clients know what those fees will be before the adviser starts work. Unsurprisingly, some advisers are proving unenthusiastic about the second.

A significant number of adviser firms have adopted a multiple charges system. There is a modest charge for an initial ‘generic’ advice report. This seems pretty good value to the client, who may be told there is no commitment for them to pay any more. Because the client commits to paying that fee regardless of whether they actually implement any of the advice, the adviser is entitled to crow about how independent and impartial they are.

But most clients want to get stuff done. That is why they consult an adviser in the first place. So the adviser has an ‘implementation fee’. In many cases this is a percentage of the sum invested, often as much as 3 per cent.

At the point when the client gets the initial generic report, they will be told that if they proceed to implementation the fee for the initial report will not attract VAT, but if they do not proceed, VAT will be added. Some will go further and say that if the client proceeds to implementation the cost of the initial report will be waived.

There are two ways of looking at this.

One is that as in any other service industry, advisers will naturally seek to break a large fee into smaller bite-sized pieces to make it more acceptable to clients.

You and I and everyone in the land is susceptible to this trick and we fall for it every day, so nobody should be surprised that some advisers adopt this practice.

But I am sceptical when such advisers claim the moral high ground. After all, one of the reasons they price in this way is to prevent their prospective clients being able to compare their fees and charges with those of rivals – and while this is a common business practice it is not one an adviser who aspires to be seen as professional should boast about.

The other way of looking at it is the rather more cynical view that those scales of percentages bear a surprisingly close relationship to the old commission scales the product-floggers used before RDR.

Ask: ‘What is the actual cost of implementation?’ and the smoke dissipates. Using modern products and wraps, the cost of implementation for most standard clients is a maximum of a couple of hundred pounds’ worth of admin time.

The actual cost is in generating the recommendations in the first place: the meetings, fact-finding, analysis and product selection and explaining the recommendations to the client. None of that can correctly be described as ‘implementation’. And if you can do all that for a £500 fee then your average client is below the level where you can actually make a profit as a whole of market adviser and you are effectively offering a dumbed down, low-cost service that will be described as restricted after your next FSA visit.

It will take the media a while to get their heads round how to compare adviser charges, but they will. I believe that ‘what you see is what you get’ is the only pricing policy that makes sense for professional financial advisers.

Chris Gilchrist is director of FiveWays Financial Planning, edits the IRS Report newsletter and is the author of the Taxbriefs Guide, The Process of Financial Planning


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There are 14 comments at the moment, we would love to hear your opinion too.

  1. What on earth did you expect? You cannot have just one charging structure. Even the FSA have grasped the fact that the “one size fits all” does not work. The RDR was never going to reduce costs – it was always going to increase them. We are a business and like any other must make a profit.
    There is nothing wrong with charging a percentage fee for implementation fee @ 3% (I have set a minimum of £645 per case so if the 3% does not equate to my minimum then the minimum fee applies – no exceptions). I do not understand the problem with waiving the “generic” fee if the client goes ahead with the business under discussion.
    Clients are not as thick as you Journo’s make them out to be. The can very easily work out the pounds and pence value of a fee and if they want to shop around then they can. I think they will quickly realise that we are all charging around the same. They may even find that some do not waive the initial “generic” fee. There is no real story here so go off and get find out the FSA’s reason for their no comment on other more important issues that affect all advisers and the wider community.

  2. And while we are at it, we should point out to clients that the amount providers used to pay out in commission, is now kept by those same providers, who have not reduced the price of the product. Apparently the FSA thinks this is entirely acceptable.
    In effect, the client is now being charged twice, no doubt advisers will, once again, be the bad guys, who are expected to perform like a charity.

  3. Hypothetical mumbo jumbo is what got us into this mess in the first place. You may want to discuss the tolerances with a few of these so called ‘clients’ as you could be surprised by their resistance to paying such fees in any guise, but fair play to you if you have a client base that will do this, or you can walk away from helping people who have a need but no willingness to pay up-front.

    The months ahead will tell the true story of how the public reacts to RDR.

  4. There seem to be a lot of suppositions by Chris on this – since when has an initial “generic” report included full product research and recommendations? Why is it a “trick” to quote fees for a generic report and then separate fees to implement? I’m guessing most advisers that operate in this way don’t include specific recommendations in the “generic” report and therefore conduct in-depth research afterwards. As an example, it is one thing to generically recommend that a client invests in an S&S ISA, it is another to recommend which fund and implement it. If, at the generic stage, the adviser explains in £’s and pence how much advice and implementation costs, then the client is free to compare the costs of implementation via other advisers. How more transparent can you be? Where, exactly, is the problem Chris??

  5. At the end of the day clients want to know what they are paying. If its good value for money, then they will keep instructing you; if not, then they will move on. The question is whether a 3% charge for say a £300k investment using a modern platform can be justified? Even charging at £300 per hour, that equates to 30 hours of work. Can that be justified?

  6. Chris

    I don’t know you, but I see this as blatant self promotion.

    Shame on you!

  7. Actually Chris I tend to agree with you. Notwithstanding the VAT issues I am reminded of cheap printers from HP, EPSON etc. where the initial cost is low but you get stuffed by the high cost of ink.
    Certainly I think many advisers are less than upfront with their clients at outset.

  8. It’s not whether the charge is reasonable or otherwise, firms have to implement charges which reflect not only the base costs of providing the services but also take into account such things as PI costs, Levies, Regulatory costs etc which can amount sometimes to 50% of turnover.

    Then there is the profit element necessary to sustain the business long term in order to sustain the services to clients and the costs of maintaining and storing up to date records, some of which have to be retained indefinitely. Planning for future screw ups by the regulator which cost us millions is also an element to consider when working out whether a fee is reasonable.

    Storage of archived files costs money, even if these are digitised the costs of digitising say an average small practices client bank of 500 is phenominal.

    There was nothing wrong with commission based remuneration as long as there was a cap on it and the literature disclosed the amounts being paid to advisers for their work, working out an hourly rate is a waste of time, some jobs seem simple and then take twice as long to get sorted than others which at first glance appeared complicated and ended up simpler.

    The FSA’s imposition of the commission ban without properly considering the consumer detriment which will inevitably come about is a symptom of the incompetence endemic within the organisation, very few of these people have even taken FPC never mind higher QCF levels and have no understanding of what consumers want.

    Good advice, economically priced, which will meet their expectations and clear reports as to why a course of action is recommended, not pages and pages of useless guff and statistics which to most consumers send their eyes to the ceiling in dismay.

    There is no hope for an industry which is governed by a regulator which is unaccountable for its errors and has not an iota of understanding of the market place for retail financial products, amply demonstrated by its lamentable performance in supervising Keydata and others who failed.

  9. I always found clients liked the choice between transparent Fee or Transparent commission and 85% of the time they Chose commission.
    Now regardless if the clients implement anything or not they are paying for my Advice and experiance

  10. Chris’ book is very good, but I am not sure what he is aiming at with this article.

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  12. Talking about transparency, why don’t the FSA insist all advisers issue invoices where clients are paying an adviser charge?
    An invoice or an adviser charge is an agreed amount that the client will pay the IFA. The invoice cam be paid by cheque or via an adviser charge.
    Issue an invoice like any other professional would. Clear, transparent, in monetary terms.

  13. Re JH @ 1.34
    “since when has an initial “generic” report included full product research and recommendations? Why is it a “trick” to quote fees for a generic report and then separate fees to implement?”
    Exactly John.
    If you buy a tv or washing machine at lets say John Lewis, you will be charged for the item. If you want them to install it that will incur another charge. If you want them to service it after the initial guarantee period, another charge, in the form of an extended warranty will apply.
    Or do you think it makes more commercial sense for them to charge everything up front?
    before the customer has decided whether or not they will simply buy the TV and do everything else themselves.

  14. FSA missed a trick with RDR. FSA should insist that:
    1. All advisers issue scope of work statement.
    2. All advisers issue invoices in all cases. (An anual one for on-going fees)

    RDR is too fluffy. Too much chaos for little benefit.

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