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Flora Maudsley-Barton: Fees should not be taken from products

Flora Maudsley Barton MM blog

Adviser charging and compiling a price list are difficult. Parsonage has been running on a service proposition and fees for quite a while now. It is published on our website and has never given me a problem. This should have put me ahead of the game for RDR preparations, but the trouble is my heart was looking backwards. There are long-standing clients with small amounts under management and I like these people. Our minimum annual fee (£600) is more than the trail commission, so the top-up fee seemed too high, before I had the commercial sense to charge it.

I suspect that many of us have wrestled with this. Despite our reputation, we care deeply about all our customers. I also fear that our desire to help is a distraction from a daunting question: At the true price of our service, how many of our customers will decide that it is not worth it? How many will drift away from financial planning?

My head, and my accountant, knew that;

1. I was not being fair to anyone by under-charging a tranche of customers (albeit a lovely bunch of people, who appreciate our service and who are better off as a result of it).
2. I should have set prices with reference to the cost of the service on day one.

Over 2012, we have not put our prices up, but we have begun imposing more rigorously our fee structure for ongoing service. Alongside that, the reviews have got better. Our clients are getting a better service and they have noticed. Correct pricing leaves enough preparation time to deliver a meaningful review.

In case you are wondering, some people did say ‘no’, nobody has sacked us (yet), a minority ‘postponed’ the review.

How much to charge is a relatively easy question to answer. It is just accounting. We start from any point except the commission we could have expected. If you have not started yet, I suggest beginning by asking all team members to record their time and tasks, to make sure that you know where the liabilities are. An example is fund closures or changes. We missed them completely at first, we had no mechanism to charge for them and they cannot wait for the annual review. They interrupt our planned workflow and demand attention.

How we should get paid seems obvious to me, but I feel like a heretic. I am not hearing the same view from many people. I do not think our fees should come from our clients’ investments, if their long-term goals are considered. Investments grow more if there are fewer deductions. That is not a revelation. Fundamentally, we can deliver more for the client if investments are not dragged back by deductions for our fees. Have we become tied up in the side questions, like whether ‘deducting fees from pension funds is tax efficient’ etc?

I realise that some clients do not want to pay directly and I am not advocating enforcement, just a shift in the default.

Knowing our clients consciously pay for our service has one huge advantage: It focuses us on service, clients have noticed and recommended us.

Good luck with your own deliberations.

Flora Maudsley-Barton is managing director of Parsonage

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. If fees dont come from deductions from the product they are paid for from the clients surplus income – which then means they are no longer available for investment.

  2. Flora, I’m afraid that you’re talking out of your ear.

    Sure the investments grow better if you don’t take your charges from them but invoice the clients directly; but that is being disingenuous.

    For example: “Your £100,000 has grown by 4% over the year Mr Client. Here is our bill for £500 for managing your portfolio”. Whichever way you want to put it the client is £500 worse off.

    If you were going to be accurate the ‘value’ is £104,000 less £500 = £103,500, or a funds under management charge of 0.48%. It’s just utilising the old pea and three cups routine and akin shifting money from one pocket to another.

    Secondly we have canvassed all our clients and given them the choice – either to be invoiced half yearly in arrears for our fund management charge or to have the money taken pro rata across all the investments in the portfolio. Will it surprise you to learn that 100% have chosen to have the charge taken from the investments? I can assure you I have some very savvy (and well off) clients, but they prefer this than having to write out regular cheques or have a DDM in my favour. Indeed as I do myself with a portfolio that I have with a stockbroker.

    If it works for you and your clients fine – but please don’t presume to imply that the rest of us are doing it wrong.

  3. Interesting this – I talk to clients in the context of the impact of charges on their wealth [as would be ascertsained by a reduction in wealth if they had a personal balance sheet]

    At the end of the day a £1,000 fee is just that; where it comes from is not such an important factor, to me I hasten to add.

    So if taken from current account, less money to invest. If taken from capital account less growth on investments. It’s up to the client at the end of the day.

    We have a mix of clients. Some on fixed fees, others on retainers and others on the soon to be retired ‘agreed remuneration’ basis. Commission is not a good model however, again in my opinion as it relies on a commission paying product being sold in order to get paid and that must introduce bias, or cross-subsidy’ at the very least.

  4. Seems very clever to take charges from a tax efficient investment.

  5. Flora- I completely agree with you.

    So, the options are (let’s assume a 40% taxpayer), take money from a tax efficent investment account or from (deposit savings), where interest is taxed at 40%. Not much of a choice

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