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Five years to profit from fees

Yellowtail Financial Planning managing director Dennis Hall says it has taken him five years to move to a fee-based model and start earning a profit.

Speaking at the launch of Aifa’s latest RDR report, Advice Horizons, last week, Hall said he has had to constantly revise and change his approach to charging fees since starting the transition process in 2005.

He said: “Over the last five years, I have had to revise the charging structure four times and every time I have had to raise my charges. I had to learn to charge for things that, traditionally, advice firms have given away for free. This means that the financial planning aspects of advice, which most firms do not charge for in the hope that the client will buy a product, must become chargeable.”

Hall also warned other IFA firms that the cost of the transition for his company, which has three advisers, was a lot higher than he expected.
He said: “I was fortunate enough to sell my house right at the top of the market, so I used that money to fund the changes in my business. I had to get this right because basically my house was riding on it.

“We wildly underestimated the cost of making these changes. I did not take a salary for the first 12 months. We are only now finally beginning to see a profit.”

Hall said businesses need to start moving clients now to a fee-based charging structure.

He said: “You cannot show up on day one of 2013 and expect to make these changes. You must start the transition process now because if you are starting from scratch it could take five years to get it right.”


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There are 15 comments at the moment, we would love to hear your opinion too.

  1. It’s the old chestnut ~ most clients on modest to medium incomes either cannot or will not pay fees, at least on an ongoing basis. If it took a firm such as Yellowtail (who are based in affluent central London) five years to get their fee proposition to profitability, then what hope for all others out in the provinces serving not-so-affluent clients?

    I think that most IFA’s rightly fear that if they wrote to all their clients informing them that from now on every quarter hour of their time (rounded up to the nearest quarter hour) will be chargeable at, say, £40 + VAT, they’d pretty quickly lose a significant slice of their client bank or the letter would be simply ignored, as would any subsequent invoices.

    Then again, I agree wholeheartedly that undertaking the pre-sale advice work on a purely speculative basis is simply no longer a sustainable business model, even if a proportion of prospects insist on clinging blindly to the unrealistic assumption that commission covers everything and costs them nothing. If we are to present ourselves as advisers rather than just product brokers, we have to educate the public that advice costs money and has to be paid for.

  2. We as a firm have probably just about got our fee charging right after about 7 years. Most of the work we do is an adviser charge through the contract and as a % of the sum invested or under managament is relevant to what is charged, simply because a lot of our clients are middle to lower earners. Some of our work is done on a fixed fee and we rarely if ever do anything on an hourly rate. So for me that’s half the RDR battle resolved and I’ll go back to focusing on getting my qualifications to the right level (although I continue to object to enforced increased minimum when marketing the need to consumers could have resulted in a deman for increased qualifcations rather than compulsion)
    The point is, the transition from commission to adviser charging combined with exams and then increased capital adequacy (like Dennis I have just sold my home in part to make sure I can access capital to meet this unjustifiable demand for firms who don’t hold client money!) does take time and I am concerned that the FSAs rush to a 2013 deadline as more problems appear by the day is unrealistic and will prove detrimental to consumers.

    My point is, that from my posts elsewhere, many may think I am anti the ideas espoused in the RDR, that is NOT the case, the deadline and compulsion is and remains the issue for what is supposed to be a free market economy….. especially when EU firms passporting in will not suffer the same.

  3. It gets mentioned quite regularly that we should charge fees like other professionals and that clients don’t mind paying fees. I think this argument is just plain wrong! People hate paying professionals fees and only pay them if they have to (ie divorce, corporate work etc), if doctors all charged fees people would not go for check ups and there would be more problems. RDR will certainly lead to a few clients wealthy / corporate clients getting advice whilst the vast majority will be driven directly to the banks.

  4. If you can find enough clients willing to pay a fixed fee of £5,000 pa then there should be no problem.

    On the other hand research seems to suggest that most clients think that Advisers are only worth about £30 ph.

    The £5000 pa market segment is fairly small I would have thought with hardly enough room for all current advisers even allowing for a 30 to 50% cull so yes I think Dennis is correct. Grab those would are willing to pay large amounts now before someone else does.

  5. I agree with Julian there is a huge education job to be done. We can rely on no one to do that job but ourselves. I further agree with him that advice costs money and that the old speculative approach is no longer sustainable.

    Phil makes some good points as well about the steps needed to deal with the triple RDR issues of adviser charging, qualifications and increased capital adequacy they do indeed take time and that precious commodity is running out.

  6. Profitable in year 1 (first 6 months working from home in north Essex, second 6 months from office in central London). Even more profitable in year 2 having taken on placement student (who generated fee income) to help with administration (everything charged at £95 per hour in 1998-2000 with no VAT and no rounding of time!!).
    Given that it is advisers who are so expensive to “employ” the secret of my success (and the secret of my subsequent struggle to maintain profitability) is to keep the adviser headcount low (which minimises regulatory costs too) and to generate strong cashflow from non-advising staff – good quality administrators working through efficient processes is what’s necessary!!

  7. There is no doubt RDR is/will be challenging. However adoption of a wrap will help greatly to make the transition at least for investment clients.However the current economic situation which is unlikely to improve much by 2013 will add to adviser woes so starting the the transition now should minimise the pain and put practices on a sounder footing. The long term benefits are clear: fewer clients who appreciate your time and advice and will pay you for it seems almost unthinkable just a few years ago.The biggest benefit is that businesses will acquire significant value measured by funds under management and not renewals which are linked to premiums paid

  8. RDR is and always has been a licence to print (more) money for the banks.

  9. To Anonymous | 13 Aug 2010 1:52 pm I am in no way banging the fees versus commission drum (or vice versa). I work on customer agreed remuneration which means I use the contract which best suits my client, which may pay no commission or may have structured commssion which cannot be declined and has to be offset.
    Picking up on Gill’s point, since 1999 I have always had at least one part time adminstrator. At our peak of operating GPPs as a one adviser firm, we had 1 full time and two part time admin, just to support little old me (and in part ready for the other adviser we toook on who has since gone off to work for a charity)
    I am in no way trying to tell people they musty go off and work on fees as whilst clients will pay modest up front fees, many don’t like writing cqs for large sums, but will happily agree for it to come out of the contract as an adviser charge with no factoring. It’s just a mental block on their part, nothing more, nothing less in my opinion. They do think we are worth the monies we charge them, whetehr it be £500 or £2,000 for the work we do, they know that that is what it has cost THEM, not the insurer, whether they write the cheque or not. My point is the RDR deadline may prove too tight now for the benefit of the consumer so in my opinion implementation of it’s different factors should be staggered.

  10. Intrigued by this constant reference to “the masses” I’ve been doing some digging :
    UK population 62m less Children 12m = 50m adults capable in the broadest sense of seeking advice.
    This equates to around 2,000 clients per adviser (assuming current working estimate of IFA population of 25,000).
    BUT Survey of Wealth in Great Britain tells me that roughly 50% of the population has never ever saved, or hasn’t saved anything at all in the prior 12 months. So let’s assume we are advising the other half of the population which is in a position to save even the smallest sums each month – that’s still 1,000 clients each, far more than we could reasonably be expected to advise.
    My point is that IFAs aren’t advising “the masses” now – we never have and we never will, regardless of any regulatory changes.
    Finally, for those of you really concerned about whether your clients will pay fees, no-one seems to mention that there’s no law forcing you to charge your clients anything – an Adviser Charge of £0.00 seems perfectly possible to me!!

  11. As an IFA if you are not targetting high net worth clients that will be willing to pay fees, then you should be considering doing something else. There is no point complaining, if you want to be an IFA then you need to have a high net worth client base. Everything else will be swallowed up by the banks.

    For those individuals that do set there business up like that, there is a great opportunity for the future.

  12. That’s interesting stats Gill – Between 1998 and 2009 I dealt with about 1,000 consumers (a couple as one consumer) and excluding one of the large GPPs we had which was an anomly (and the employees were customers nt clients using teh dictionary definition) but as most of the income comes from about 100-150 of those, we segmented our consuemr base in to Clients (regular ongoing service paying a nominal fee with services discounted on pay as you go as a result of the nominal fee) and customers (no contractural ongoing service or fee and advise charged as pay as you go).
    On those maths, I had my share of the population who actually saved. My point is, that I still have my share, but have hopefully manageed the expectations of those willing to pay for ongoing service and those who are not, where we will compete or not against the more regimented service offering of the bacnks, but only if we want to.
    So we I’d disagee with Gill is that some of us have been advising “the masses”, but are now much less likely to and if adviser numbers drop, it will be more likely we will not be and this is why I am not convinced the RDR timescale is good for the consumer…

  13. Robert Donaldson 13th August 2010 at 4:34 pm

    Some interesting comments. I decided that when clients bring in that big bag of goodies and expects youj then to advise them what they have and fill in the gaps etc etc, I thought I would charge at least a flat rate fee for that work so I am being paid.

    However I find it relatively easy at a first meeting to know where you are going with a client and thus can assess whether or not you wish to take the work on, does he wish you to take the work on and is it going to pay – hopefully and make a profit.

    As per Yellowtail, there is no one solution fits all and you need to refine it as time goes by. However having spoken to one person who recently did a huge amount of work for a number of people who have since done all the investment through the internet, I know that change is needed.

    Sod them if they won’t pay for advice they won’t get it from someone else for free – if they do they won’t be in business for long.

    Good luck to all

  14. Somebody somewhere on one of the blogs on this topic suggested that IFA’s ought to regard pre-sale work as tendering for the business in the same way as does a builder. The comparison is, however, invalid, because a builder rarely does the design work, unlerss the job is entirely straightforward. For that you need an architect and an architect doesn’t give his time FOC. Even if a firm of builders offered a design service for things like extensions or annexes, they wouldn’t offer that FOC either.

    The message is clear: Do you want to be a mere product broker or do you want to be a financial architect/designer?

  15. Even those who charge fees and think they have got it right often do not. They do not understand what their costs are both now and in the future, and, more importantly, to build in a proportion of their fee to fund for future changes in legislation (e.g. RDR, CA. business development, training etc.)
    Many IFAs charge what they think they can get and if they make a profit – great. But is more by luck than judgement.

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