I have charged fees for more than 20 years. When advising on investments I write to the client and advise my charges upfront before I start any work. There is an initial charge, paid directly, and there is an ongoing funds under management charge. Until December 2012 clients could choose whether to pay me the ongoing charge directly half yearly in arrears, or to have this automatically taken from the investment.
My FUM charge is tiered and varies between 0.25 per cent and 0.5 per cent per annum. Before the RDR all my clients opted to have the FUM charge taken from their investments, many of which were held on platforms. When the platforms finally made their position clear on facilitating adviser charging, I had a huge amount of work to do.
My due diligence found if clients wanted to take the FUM charge from their investments, most of the platforms had a very unsatisfactory proposition. Take it from the largest fund – this made valuations a complete nonsense. Take it from the cash account – also impractical, as many of my clients have investments purely for capital growth and any generated income is reinvested. For those who take income it would also be equally stupid to take money away from their income amounts. I was left with the unenviable task of writing to clients and telling them I had found one platform that was able to carry out a pro-rata sell down across all funds.
I then had to produce two spreadsheets showing the effects of charging in pound terms for each platform and how it would work and saying that if they wanted to continue to take the charges from the investments they would have to transfer to the other platform – which happens to be Skandia. Alternatively, if they were prepared to pay me directly half yearly in arrears, then they could stay with the platform they were with.
Would it surprise anyone to learn that most clients opted to move platforms? Some of my wealthiest clients, although quite happy to pay me for upfront advice by cheque, just did not want to pay the ongoing FUM charge directly.
Let me underline that clients do get a service for the ongoing FUM charge. Comprehensive valuations are accompanied by a full narrative explaining what changes, if any, are warranted and the reasons why.
Clients are perfectly entitled to know exactly what they are paying their advisers and what they get in exchange. On the other hand I think it is unarguable that client choice will be removed if fully disclosed adviser charging is no longer permitted. It is a matter of how the FCA monitors the disclosure.
As far as bonds are concerned, when income is taken, it is quite plainly not tenable to take a full 0.5 per cent ongoing charge, it has to be reduced. Until now I have had no problem in explaining to the client that if they want to take income, the ongoing charge will mean they can no longer receive the maximum five per cent.
I hope this puts into perspective why clients should be able to pay for advice how they want.
Whether those responsible will take a blind bit of notice is of course another question entirely.
Harry Katz is principal at Norwest Consultants