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Chris Gilchrist: How do you kill the commission zombie?

Connoisseurs of the genre will know that it is very, very hard to kill off a zombie. Decapitated, blasted with flame or toxic chemicals, the deformed, diseased creature picks itself up and stumbles on, even more terrifying in its latest more hideous manifestation.

There is no resemblance between zombies and commission. Or is there?

The intention behind adviser-charging is clear enough. A financial adviser’s client must agree in advance a fee expressed in monetary terms. For those firms that have genuinely embraced a professional model of operation, no problem.

The principle here is that the fee for the service should bear some relationship to the cost of providing it.

Although regulations do not require advisers to time-charge, every business consultant I have seen quoted (and there seem to be an awful lot of them these days) says firms must log advisers’ and administrators’ time so they know what their costs really are. They say, probably correctly, that this is an essential check on the profitability of the business overall as well as of the different types of clients it has and the different kinds of advice it gives them.

A professional fee model would seem to start from the costs and add a margin relating to the complexity, expertise required, liability for the firm and other factors.
As we know, this is not where advisers used to start from, namely product providers’ commission schedules.

So long as there is a clear intention to undertake financial intermediation at the outset (and it seems even an intention to recommend the use of an annual Isa allowance will do) advisers’ fees will not normally attract VAT. So some old models that divided adviser fees in two – part VAT-able and part not – may not actually be valid in terms of the tax rules.

I can think of two reasons why some advisers may want to continue with models of this kind. One is that bigger advice firms incur substantial VAT bills, so charging VAT themselves is advantageous to the firm. This may partly explain the enthusiasm of some adviser firms to establish their own discretionary fund management services, where fees unequivocally do attract VAT. The DFM division of the firm might pay a bigger share of VAT-able costs than the advisory arm charging VAT-exempt fees.

The second reason is that dividing fees into smaller chunks can make big fee bills less unpalatable.

One model here is a fee for advice followed by a separate fee for implementation. The fee for advice can seem quite low, perhaps only around £1,000 on a moderately complex case, but the implementation fee is then 2 per cent or 3 per cent of the sum invested. AAARGH! The zombie lives!

Imagine you go to a solicitor to get a will. His fee for meeting you and drafting the will is a modest £100 but when you ask for a copy, he charges £250 for producing a fancy printed version. Will this lawyer stay in business?

The actual costs of implementation today are a negligible part of the overall costs of the advice process for many types of advice.

By far the greatest element of cost is the adviser’s time. Charging methods that deny this reality probably will not survive the test of a market-place where clients compare the real cash costs of advice.

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


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. The question is will the public pay for advice at the level that actually covers costs with a profit?

    The answer is probably no as the dont see financial advice as valuable.

    And why dont they see financial advice as valuable – because we have things like the Money Advice Service and websites that dont give advice but purport to give free advice unlike those bad advisers who want paying for advice.

    Also lets face it no one would pay a solicitor or accountant the prices they charge if they could do the work themselves.

  2. Dear Mr Gilchrist, I am not sure what planet you live on, but clients have been happy since 1999 to let commission pay our income. The normal average client cannot afford to pay me £1000 fee up front for the time it takes to properly research a regular contribution of £100pm in a pension product let’s say. That is based on just £100 per hour for time and includes costs for all meetings, research, time travelling to/from client and the dreadful profit word. The only way to get this will be from the product, but the FSA have banned factoring so I have to get this on the drip, so £83.33pm for the first 12 months. That’s fine over the year but business is about cash flow and the new rules are going to screw small IFA’s with average client banks and by definition screw the clients by them not being able to access advice die to cost. Even the FSA have admitted this previously. There has never been anything wrong in getting commission for selling a product (yes selling) and since 1999 clients have seen exactly what they are paying for their purchases. If they are happy and we are happy and earning a reasonable living then there was no problem with it. The RDR is going to put costs up again as it blows the “estimated implementation and ongoing costs out of the water”. They could have very easily and simply controlled the maximum commission at x, y or z which would have removed any of the bias that they couldn’t find in any research they did (so dreamed up customer perceived bias as potentially being there). This would have been so much simpler and cheaper to the industry, IFA’s & clients. But they refused, saying that they could not control the rate of commission payable. WRONG as that is exactly what the RDR is going to do – control commission down to zero. There are now more “unintentional consequences” of RDR to the potential detriment of industry and consumers than benefits (if there ever were any) and still this roller coaster is raging towards implementation and will the FSA listen and act upon common sense? Duh!!!!!!!! They blast on to save face and to hell with the cost to us and clients. I challenge Marin Wheatley to put a hold on this ridiculous machine as the morons who dreamed it up will have now all left so there is no face saving to be done. He can simply say that having reviewed the evidence there is much to be done to this abysmal beast before it can work in practice, so it’s delayed until further notice. Somehow I think not else he would not have been given the job in the first place.

  3. The Zombie is dead. Long live the Zombie!

  4. I think the system is fine as it is… This up front charging will lead to smaller clients only being able to take advice from banks.. therefore not really helping the client find the best product in the market! The FSA are a total shambles..and this whole RDR is a pain in the backside and will be a total waste of time, and money.

  5. Hi Marty – hope you don’t mind me saying, but £1,000 seems a lot to charge for a £100 per month pension? I’m surprised you are able to earn this on a commission basis?

  6. Marty is a regular complainant about RDR on here.

    Now we learn he wants £1,000 just for arranging £100 per month personal pension.

    I’ve no idea how he currently charges his client so much, via commission. But I’m shocked that an adviser as expensive as he is also wants the fee or commission paid before the premiums, and is insisting on factoring.

    I’m not sure if RDR is the problem here…maybe it’s the business model?

  7. Exasperated Me 4th July 2012 at 10:47 am

    The “Zombie” is wearing a new suit (no tie) called “fees”, he/she/it charges upwards of £12,000 up front to arrange a £300k investment on a platform and the annual ‘management’ charge starts at £4,500.

    What a bargain.

  8. @Richard 3.45 & Annon @ 8.15. Apologies that was a typo – it shouldhave read £200pm. To Anon Ref regular complainant of RDR, you bet your ass I am. I have 26 years in the business, have 852 clients and haven’t taken on a new client in 7 years. Its called service, you should try it. There is nothing wrong with my business model for the clients. I have had my first complaint as an adviser and it was sent to me by a client asking that I forward it to FSA. It was their disgust at the manner in which they are loosing their choice of how they pay me. I am not sure if you were one of the original supporters of RDR, as you dont put your name to anything, if you were, it seems you and a lot of your cohorts have gone very quiet with support as more and more “unintended consequences” come to light that will lead to detriment of clients. If you were not a supporter of this then accpet my apology for lumping you in with these extremely thick bunch of idiots who who could not see the wood for the trees. I know I am going to have to change to adviser charging and clients wont have any choice but I dont like it as it will affect my turnover and everyone elses turnover dramatically (if you think anything otherwise you are deluded) and I am resentful for that, hence I make no bones about “complaining”. Again apologies for the original typo that caused your comments and this drivel in reply

  9. The proof of the pudding will be how many business models actually survive until 2014 and beyond. There has been much talking and bluster, and many smug postings over the last few years from advisers who think they have a winning formula. Thank Heavens the time for talking is almost over, and then we will see who is left standing. I bet the results will be interesting to say the least.

  10. Imagine you go to a solicitor. He charges £100 for a will. Imagine if he charged £250 for a copy. What drivil! A solicitor will hold the will, ensuring any codicil is chargeable. He trys to make his firm or his sucessors named as executors, so the firm can charge for probate. This fee is often a percentage of the estates value, oftem many thousands of pounds. So this will with executorship adds to the value of the firm when it is sold on.
    So don’t lecture me on the professionalism of solicitors. There is a load of corruption, ambulance chasing, and charging insurance companies excessive fees for whiplash injuries, the list goes on.
    But its on a fee model, so that’s OK

  11. So commission where the cost of advice is borne by the client over the term of the investment is bad.

    Yet we have NEST where the cost of setting up the plan is charged over the term of the investment by higher initial charges is good.


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