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