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