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Don’t undervalue your advice

About 12 years ago, I went to see a solicitor mate of mine about writing a will for me. “Sure, no problem,” he said, “let me just switch the computer on and we will have you sorted in a couple of minutes.”

He inserted a disk into his computer, opened a file on his hard drive and started asking me questions about what I might want to leave and who to.

Every now and then, he would pull up a particular paragraph from a list on the program and insert it, or delete another paragraph, or add a couple of names and a sum of money to a blank spot in the document.

The software program was, even back then, able to flag up various tax-related issues for me to consider, on which my mate gave advice as we spoke and, based on my replies, he then amended the will accordingly, using stock phrases to suit.

The software was even able to cope magnificently with my slightly tongue-in-cheek decision to bequeath various items of clothing to my partner, who had a habit of “borrowing” them from my wardrobe and wearing them herself.

I was reminded of this experience when reading the responses to my column last week, in which I asked whether offering “free advice” to clients and being remunerated by means of commiss-ion received for a product sale relating to that advice was a sensible business strategy.

For many IFAs who have replied to my column, it clearly is. They do not see an issue with offering their clients a free financial report in the expectation of winning business off them.

It must be said that while there is no reason at all to prevent an adviser from operating in this way, it does beg a few questions.

Probably the most obvious one is that of what happens if the client likes the report but prefers to execute it elsewhere. In that case, the IFA has just wasted a few hundred quids’ worth of time compiling the document, not to mention paying for the software that allowed him to knock it out in the first place.

More important, certainly from a philosophical point of view, is the question of what the client is actually paying for when he or she agrees to this kind of deal. It cannot be the advice itself, which is deemed to be so devoid of value by the IFA that it is not even worth charging for.

The only answer I can come up with is that the IFA is right and the report is rubbish. That is not as far-fetched as it might seem. About 10 years ago, I acted as a guinea pig for an adviser who offered me a report in return for answering a number of personal financial questions about myself.

The report, compiled on the same basis as my lawyer friend’s, simply told me what I knew already – that I was underprovided in terms of my pension, I needed more life insurance and I should strongly consider the merits of a PHI policy, among various products. It declined, however, to tell me what to do with my existing investments, or the best life cover and PHI policies for me to buy.

If that is all a “free report” is about, IFAs are probably better trying to make money by earning commission on a product sale. Conversely, if I were being asked to pay for “advice” as shabby as that, I would feel cheated.

A genuine financial report, one worth paying hundreds of pounds for, not only calculates how much your pension lump sum will be worth in 20 years time, for example, along with a pretty little graph. It also looks under the bonnet of your existing policies, tells you how they match your risk profile and potential expectations and offers a range of very specific options about where to invest your money instead.

It is the kind of report that clients could, if they wanted, take anywhere else and act on its advice if they chose to. Except they would not want to, because the thoroughness of the report, plus the IFA’s competitive charges for carrying out each transaction on their client’s behalf, would make it much easier to trust the adviser to do it for them.

Ultimately, that is how other professionals work, surely. You will not see a chartered accountant write you a free detailed report about every specific point of tax law that he expects to raise with HMRC on your behalf. Or a lawyer send you, free of charge, a draft of a letter he proposes to send on your behalf to someone you are suing.

After all, if you have gained a massive body of knowledge and expertise over the years, not to mention paid thousands of pounds for the technical software you need to help your business, why would you give it away for free?

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 36 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevens 5th May 2011 at 10:35 am

    I agree completely (!), though let us not assume that solicitors always provide comprehensive or even best advice just because they always charge a fee for it.

    I’m presently looking at the affairs of a moderately HNW couple. Some years ago, the husband’s mother set up a Trust fund naming him and his wife as beneficiaries in specified proportions, with the balance divided equally between their children. As it happens, the couple are quite probably never going to want to claim their share of the trust fund but, because they’re shares of it are specified, it looks like it may well be an Absolute rather than Discretionary Trust, so quite why the solicitor recommended the former rather than the latter is something of a mystery. Also, the only two trustees are the husband and wife (the settlor is now deceased) so, should they both become unable to act, the Trust will effectively become rudderless. Whether or not the Trust affords scope for the appointment of additional Trustees is something else we’ve got to try to establish.

    But, by and large, I agree completely with Nic. A “report” for which no charge has been levied cannot be anything more than a speculative pitch for a commission-generating product sale.

  2. We always charge for the report. We tell the client how much it will cost before we begin.
    Upon receipt of the report the client can act upon it through us or elsewhere if they choose.
    We cannot afford the time and effort to compile a comprehensive report for free. Indeed why should we? We believe the value is in the advice.

  3. I agree with Nic however I wonder at what point do we receive the charge as unless the client hands over a cheque in exchange for the report then there isnt much change from the norm.

  4. John Joe McGinley 5th May 2011 at 11:19 am

    Totaly agree the value is in the advice but also the experience, empathy and expertise that makes the advice possible.

  5. In all the years I’ve been reading Nic’s columns this is the first one I agree with whole heartedly.
    At last Nic you make sense.

  6. Its very easy really…Yr Terms of Engagement should be signed by the client agreeing to yr fee basis & can then be legally enforced if they fail to pay/alternatively they get the report after they pay the fee. Its not rocket science!!

  7. Fraser Brydon 5th May 2011 at 11:31 am

    Here we go again, let’s compare a solicitor or accountant with an IFA, more cheap shots at our expense. The two have no correlation, Solicitors are transactional – we use them for a particular need, accountants when we have to talk with HMRC, submit reurns, prepare accounts etc all transactional. You ask either for an opinion then they’ll provide at no cost, similarily an IFA can give an opinion at no cost, written or verbal, the IFA then charges to transact the business and offers an ongoing service for a cost. Please get off the moral high ground and go and run a business then let’s read the smug remarks.

  8. Nic

    When you went to see your lawyer friend were you happy to pay whatever fee he asked for before you knew the level of his expertise and the quality of the Will?

    Did you pay his fee?

    The problem is that with accountants and solicitors, the public know that all will charge a fee and, without a recommendation, have to risk that the advice may be lacking or even bad. Whereas the public know they can still get “free” financial advice from, for example, the banks.

  9. At last, an article from Nic to which I would wholly subscribe.

    But the problem remains that the vast majority of potential clients still expect ‘free’ advice and know that ‘free’ advise is available elsewhere.

    Until all advisers are singing from the same hymn sheet it will be difficult convincing ‘the great unwashed’ that paying for advice is likely to be better than acting upon free advice.

  10. didnt realise you actually understood what we do for a living.

    makes a nice change from the usual “anti”.

    cant wait for the next instalment.

  11. Simon Mansell 5th May 2011 at 11:42 am

    This is a interesting article which draws me to a comparison between an IFA and an optometrist who both derives remuneration in a similar way. It takes many years to qualify as a Doctor of Optometry i.e. degree, over several years of study. As a result they are able to diagnose vision problems, diseases of the eye, brain tumours and related diseases. They are of course also responsible for prescribing corrective eyeglasses and contact lenses.

    In spite of all this skill opticians make “no money” from testing people’s eyes. The business only makes money by selling frames and lenses, a commission based product! This is because the general public will not pay for the skills of a professional who could detect diseases of the eye or even a brain tumours, a service that can save life and or sight.

    With regard to many financial products they are intangible products i.e. sold for event yet to occur and in some cases that may never occur and intangible products are always sold and never purchased! RDR is not tested or thought out and as a results of this ham fisted muddle may destroy a whole sector of financial planning advice to the detriment of the consumer and the industry that supports him/her.

  12. I totally agree with Simon. The difficulty in the RDR world is going to be getting “normal” clients through the door. At the moment, they are quite happy to walk in and talk, and fully understand that if the advice they receive results in a sale, then commission will be payable. There are very few clients in my area (a seaside town with high unemployment and relatively few “high net worth”) who are happy to walk through my door and expect to pay for a financial review report.

    Clients with lump sums to invest may think differently, but will be discouraged from shopping around if they have to pay for a report from more than one adviser.

  13. OK, I’m in shock now… I actually agree with Nic C! Julian makes soem very good points and Simon M & Tracey C go on to highlight some of the difficulties as it does depend upon the type of clients you are dealing with.
    We agree our work based on different stages 1. Initial meeting to find out how we can help and if we want to work together (no charge), Second stage reserach and advice (reports etc) (cjargeable) and3 rd Stage implementation (chargable). The client signs at the end of the first stage and before the 2nd stage begins agreeing we charge for each stage. Payment is invariably made at the end of all stages still…..

  14. Pissed Off IFA 5th May 2011 at 12:47 pm

    Hi Nic

    I will take on board what you have said not as a financial journalist ( which have no right to be!) but as a potential consumer. Yes, I agree with some of the other comments this is your best article to date over the last 20 odd years.

  15. It does amaze me (in this day and age) that advisers are willing to provide a financial plan/report for free on the assumption that they will get paid for the business they hope to write. This is surely a highly speculative way of generating income. Even if the client doesn’t transact, they still have a ‘documet’ that can be used to potentially cause problems for the adviser at a later date.

    I recently saw a coupe who had never engaged with an adviser before but were rather gobsmsacked that I would require payment for the analysis of their affairs (shortfall analysis, distaser analysis etc). I told them that it was impossible for me to know what solutions they might need if I didn’t do an analysis of their situation. They then went to another adviser afterwards but had decided not to act on his recommendations. I wonder how long the other adviser had spent with them for no reward!

    Free advice just has no value and poeple will take the p**s if they can get away with it.

  16. Simon Webster 5th May 2011 at 1:05 pm

    Advisers in whatever descipline exchange time & expertise for money. We shoudln’t care whether we receive fee or commission as long as ultimately we receive money.

    In my experience clients don’t care what they pay as long as they receive value. The issue is client education. Many a client has asked me to solve their problem, to which I sometimes reply “why would I want to?” To which they might reply because you are paid to do this. To which I reply “by whom?”

    Once the ground rules are established the rest is easy…

  17. The present back drop to the perfect scenerio of clients paying fees for excellent advice , is over the last couple of decades clients have been provided with a little knowledge, a dangrous……., coupled with the growth of comparison web sites and clever branding the advisor has a major battle. Which I intend continuing until sense prevails!

  18. john katsouris 5th May 2011 at 1:16 pm

    Interesting mate.

  19. Although I agree with some of the comments made by Nic, I am continually disappointed by his need to write in such a cynical manner.

    Why does he consider it necessary to refer to ‘pretty little graphs’ in a genuine financial report?

    Why is it necessary to refer to a ‘massive body of knowledge’ and comment upon the software ‘you need to run your business’?

    All businesses have expenses, whether rent, staff or IT etc, and you don’t buy a German car and question why it uses a computer to run the engine management system or question the service engineer who plugs it in to find faults within seconds, only to baulk at the repair bills.

    Because some of you are missing the point. Nic doesn’t believe that IFAs have the knowledge to do the job well, and we shouldn’t charge for software, as he thinks the software does our job for us.

    In my opinion, some journalists are like food and art critics, and we know why. They’ve never cooked a meal nor painted a painting. But it’s an age old debate that you don’t have to be a good chef to know good food. This is correct, but being a good chef is extremely hard work and being a critic is extremely easy. You sit at the table with a glass of wine, on your high horse and enjoy the hard labours of someone else at their cost and write about it. It’s not an exact science, it’s only a personal opinion, but there’s no redress. Funnily enough my school career adviser didn’t ever encourage me to consider being ‘a critic’ but that’s because it wasn’t a profession then.

    Nic, take the exams, gain the knowledge, buy the software and find clients who would trust you to provide a service at reasonable cost. Keep up to date with fund managers and product providers, legislative changes, and torrid markets brought on by greedy banks and governments then I’ll provide more exams more compliance and a few invoices for failed corrupt organisations that you had no dealings with at all, whilst you try and balance a life at home with kids and family. It’s not rocket science, but do a good job, charge accordingly and it is rewarding.

    Must dash, I hear my solicitor is ringing me to suggest that I amend my Will due to the changes made to the Nil Rate Band and how this can be passed to spouse if unused on first death. Oh no, it was my accountant calling me to advise me to use my CGT allowance because my portfolio is up 20% this year….

    was I dreaming? No these were the calls I made to my clients, without selling a product and without charging a commission. What am i doing wrong? I am supposed to be a greedy IFA with no knowledge only a sophisticated software system.

    If IFA’s do not do a good honest job and charge competitively then who know’s, clients may end up in the hands of advice from the papers, written by journalists with no training, no exams or qualifications and no experience of providing advice but what’s worse, they wont be able to complain to the ombudsman if it all goes wrong.

    Then again they could end up talking to Bank Plc and enjoy the merits of a Bank Plc Cash ISA or Bank Plc Managed fund costing 7% as an initial commission.

  20. Perhaps, in order to get the general public to value advice more, all IFA’s should club together and charge a fee to be seen of, say, at least £250. If all IFA’s did it then RDR is less of a burden. The reality, of course, is that IFA’s will break ranks, and that the public simply won’t pay. Sorry to sound so pessimistic but I see financial advice becoming the preserve of the wealthy few.

  21. Stuart McGinnis 5th May 2011 at 2:37 pm

    I agree that advice should not be free and my business model is based on giving advice and researching and arranging suitable products. They are 2 distinct jobs – I tell clients this and charge them separately. They pay for the report before I write it. The report is specific to their circumstances yet does not include specific company products or funds. We agree that they are happy with the plan we have built for them and then decide if they want us to implement it. If they do we charge for this work separately – either commission or fee just now but soon consumer agreed remuneration or fee.

    I do not see a problem with a generic report that lays out cash flow, capital position, tax and then the actions and generic products that the client should use to address this – specific to their situation.

    If you are charging clients for what you do for them then if you follow Nic’s suggestion you will have done 90% of the work in preparing the report but only charged for say 40% of the work – this does not make sense to me.

    It is our collective responsibility as IFAs to educate our clients into understanding that if we are not paid for what we do for them then we need to charge them more to subsidise those that got something for nothing – that old chesnut.

    I have had very few clients that have backed away from this – but then I have only been a practising IFA for less than a year and don’t have all the history of the way it used to work….mmmmmm!

  22. I keep on hearing about free advice, but there is no such thing, it’s more a question of who is paying.

    A client said to me some years ago, after arriving for the first meeting at his home, which I had said was free and without obligation, that I was wrong.

    I was rather bemused as we hadn’t begun the discussions yet.

    ‘Simon’ he said, ‘this meeting is not free, but it is without cost to me. You are bearing the cost yourself, as it is your time that you are spending here with me that you could be spending on other things.’

    I have never forgotten this, so I now explain to clients, that although the first meeting is without obligation, it is not free but I shall be covering the costs myself.

    Take a man on the street who walks into HighStreet Bank Plc and asks to see an adviser. He asks lots of questions, has a two hour meeting, and walks away with plenty of advice but doesnt come back nor does he buy a product. The adviser does this every day all month with customer after customer, but receives his salary, the bank still has its rent to pay, and salaries for the advisers assistant and maybe para planner. It is has to pay dividends to shareholders but it can do this through the profits generated by its customers and the transactions that they make.

    If you are ever a ‘potential’ customer and can walk away then this is being paid for by the customers who dont, it is not free, it is just being paid by everyone else.

  23. Ed Holder (Holder & Combes) 5th May 2011 at 4:00 pm

    Excellent article Nic – I agree completely.

    Advisers who insist on ‘not charging for advice’ so that they can usher people toward commission paying policies are only fuelling the confusion.

    All professionals will, at times, engage a client on a pro bono basis to win their trust if commercially required. But the norm needs to shift so that we charge for the work that we do, which should be to advise, not sell!

  24. John Hutton-Attenborough 5th May 2011 at 5:13 pm

    Simon is absolutely bang on and the word “free” should be banished from anything you do as it undervalues your skill.

    Everything should be done either at the client’s expense, or your own. Put a value on it and tell the client so he can respect what you are doing.

  25. Julian Stevens 5th May 2011 at 5:53 pm

    There is, of course, the potential problem that prospective clients who won’t pay a fee will go elsewhere to try to get for nothing what they’d hoped to get from you. But on those kind of people, you simply have to turn your back and walk away. With the passage of time and the way in which our profession is evolving, they’ll find it harder and harder to find someone else to do it all for nothing. Concentrate instead on those clients who value what you do and who are prepared to pay you for it. As the tv ad goes ~ you know you’re worth it. Or, if you don’t, then you need to take a good hard look at your business model, because it may well not be very sustainable for much longer.

  26. @ Simon – thanks for that, I’ve learnt sonething new and will take on board what you said about the first meeting being at my cost, without obligation to the client (other than to tell me if they don’t require my service) and as such is not “free”

  27. Give the CLIENT the choice, one size does not fit all, for some IFA’s 100% fees are the norm, some a split and some commission.
    It is the Advice and the best outcome for the customer that matters not the way we are remunerated.

  28. I am not anti commission, but other than for regular premium business, I can’t see why adviser charging is a problem to so many advisers. The adviser charge can still be taking from the contract, it is just that the provider cannot influence what is paid.
    I do think there is a problem which need resolving with regard banging commission with regular premium contracts as spreading the payments for advice on regular premium contracts over 2-4 years does not help with the cashflow for a new business, so some form of factoring is needed.
    I am ready to be shot down by either anti commission or anti fee advisers for what I have said. But have said it to see if I can work out what everyones problem is!

  29. Tyrone Murphy 6th May 2011 at 10:51 am

    The arguements provided so far are largely fair and point in the direction of how things should be and may eventually become in the future.

    Problems have arisen where advisers are being pro-active and are trying to generate business from potential clients where the adviser has made the first approacht. If the client approaches the adviser it is relatively easy to discuss the client paying a fee for the use of the advisers service. However, if the adviser is approaching a potential client who may only have a passing interest in discussing their financial requirements with the adviser. The question of having to pay an upfront fee for advice will probably put the potential client off seeking advice. This is where the free offer of advice has been used to convince people who would otherwise have not considered speaking to the adviser, to proceed. They will view it from the perspective of ‘I have got nothing to loose as if I don’t like what the adviser is telling me I don’t have to see them again and it has not cost me anything’. Where as if they know that they will have to pay a fee come what may they are more likely to decline the offer of a meeting.

    The obvious answer would be to only deal with people who approach you. However, there may not be sufficient potential clients approaching you to make your business viable.

  30. Another good one Nic.

    As usual we get Fraser Brydon coming along with his shocking humour!

    Simon Mansell talks about the similarity between optometrists. Interesting to note that big chains are now beginning to charge customers money as optometrists are saying they “don’t feel their advice is being valued”.

    Look, they may give “free” advice, but the patient ends up buying glasses mainly if they like the optometrist. You do get some (now becoming more) who will get the eye test and go and buy it online. That’s undersandable because they were firstly offered a free eye test and then were not told why they should see the same person every year.

    I know one former PFS president who does not charge clients for reports. He gives a fully comprehensive, detailed report without any obligations. Funnily enough, he says that less than 1% don’t proceed with the advice through his firm. Being chartered and certified, as well as extremely caring might be why he is so successful.

    The sooner people stop this “free advice” nonsense the better for the profession.

  31. @anonymous 10.51am
    But this is the whole point. Until the general public recognise the value of what you/ the profession offer they will continue to expect you to hold a meeting, write a “comprehensive report”, research everything that you are going to offer them, spend hours revising for exams, taking them and being at their beck and call until they say “no thanks”. If you need something from an accountant/ solicitor you already know you will be expected to pay a fee and also attend their offices in their working time. Why should we be considered any different unless you persist with the status quo?

  32. Tyrone Murphy 9th May 2011 at 11:10 am

    In reply to John Hutton, I know that this is the whole point. However, the fact of the matter is that most consumers do not see financial advisers as being on a par with accountants or solicitors. This is a fact of life and simply stating that it should not be the case will not change the facts of the situation.

    Customers usually approach an accountant or a solicitor for advice. Financial advisers usually approach the customer because most customers are not sufficiently interested in the subject to actively seek advice. Therefore if you approach someone to get them interested in your proposition. The mention of them having to pay a fee to speak to you is bound to put them off. This is just a simple statement of fact.

    A number of advisers are in the lucky position of having enough customers approaching them to enable them to charge fees and make a good living. However, this cannot apply to the whole adviser community by the very nature of consumers attitudes towards financial advice and financial advisers in general.

  33. Increasingly Frustrated Adviser 9th May 2011 at 11:35 am

    John Hutton I Agree. Anon. Agree too.
    We all would like to be compared to solicitors accountant and other “proffessions”. but the problem I see is this.
    Client divorces. Needs solicitor (well think they do) Client buys house. Needs solicitor. Clients fills in tax return. Needs accountant. The word here is NEED at a time of NEED. A specific and identified problem that they have come across needs an outcome. So they look for help. So the client will pay. Does a client NEED a pension. No (in the clients eyes) till they retire. Clients are often happy to pay a mortgage broker becuase they need a mortgage.
    Until education outside of the industry is stepped up and clients need to arrange a pension or realise they need investments etc then charging fees is not going to be easy when we have convinced the client that they need something, when they percieve they dont.

  34. LOL @ the two comments just below John Hutton!!

    So, just because that’s the way it is, we shouldn’t try to change it? Sounds like a loser attitude.
    And for the next one, seems like a client will pay for anything as when the need arises…sounds like a p*ss poor salesman – no wonder you’re frustrated.

    Of course if you approach someone trying to sell them a product they will (rightly) tell you to get lost. When you understand how to sell your service and its benefits (if ever you do provide one) then you might find people coming to you.

    Just keep at it and it will begin to happen.

  35. Tyrone Murphy 10th May 2011 at 9:06 am

    These blogs always seem to end up being hijacked by some egotistical, obnoxious bore such as Harry. Who try and use it as an opportunity to blow their own trumpet and insult other people. Instead of focusing on the facts of the discussion they have to go off at a tangent which relates to how good they are and what a brilliant service they provide to their clients.

    To people like Harry I would just say “Self praise, is no praise”.

  36. Incresingly Frustrated Adviser 10th May 2011 at 9:21 am

    @Harry. Yes agree Harry. Am a very p*ss poor salesman. Thats because I advise my clients, not sell to them.

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