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Harry Katz: Clients need the freedom to choose on charges

 

 

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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

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Very well put, Harry.

    Being client-centric will never catch on, though, how can you be sure they really understand this? Expect to have to survey them to check understanding.

  2. Harry

    I don’t really understand your point as clients have always paid some form of adviser fee it is just that that fee is now clearer. Whether the fees deducted from the cash account or from the largest fund is a bit of a misnomer particularly as many advisers auto rebalance their portfolios reasonably regular basis, so I don’t understand the point about valuations.

    I do however agree that client should have a choice on how fess are paid and in my opinion the problem with both the FCA and the PRA is that they both seem to think that advice should be free. Both of these organisations need to realise that they need to engage with advisers to help bridge the advice gap, yes there are going to be excesses in the market that surely market forces should eventually see those advisers overcharging reduce their charges through a free competitive market. I said it before and I’ll say it again that if the FCA would concentrate on breaking the link between providers and advisers in respects to backhanders then charges will eventually come down particularly fund manager and product charges. It is interesting that they are now cottoning onto this, which is a really good thing as it provides a level playing field for the first time.

    The other thing I would totally agree with is that some platforms need to desperately improve their systems in respects to adviser charging and also recognise that we are not their employees. I could name one in particular but I think that would be unfair on Money Marketing lets just say it’s a platform that recently got sold to an insurance company.

  3. Harry, why do you, as a longstandging IFA, believe that you understand the advice business better than the regulator? I find this arrogance quite, well, arrogant!

    Surely you must understand that the regulator has spent millions of pounds discussing this issue with people who, may or may not, have taken advice from ‘professionals’ (see banks in the dictionary) over the years and the results they got back was that customers, clients if you want, just dont want choice! What they want is to come into your office and write you a cheque for disturbing you and stopping you from completing the next level of ‘Angry Birds’.

    Why would you have the audacity to believe that you have more knowledge or experience of the financial services industry than the people at the head of the latest regulator? Do you not think these people know what they are doing? Having studied for many years to get to the same level of competency as yourself, and presumably beyond (they are regulators after all), do you not think they understand the markets and the wants and needs of the everyday folk they simply want to protect?

    These rules and regulations must be being put in place to best serve YOUR customers and just because you see these people and know these people on a very personal and financial basis cant possibly mean you know and understand their needs and wants better than someone in an office in London, who has never actually met, sold or advised on a financial product in their lives.

    What we should be doing is embracing RDR and allowing the banks and the large insurance companies to advice and recommend quality products to the general public in the way they have done for years on a ‘free’ basis. Surely this can only go well? Oh, hang on……..

  4. Good article Harry and I totally agree that it is the client and ONLY the client who should have the choice of how to pay. Unfortunately the FCA is only concerned with making sure they spin whatever they need to so they can say RDR is a resounding success, regardless of the reems of unintended consequences. I do hope they listen but as usual I am sure they will do nothing.

  5. I would go a little further. Clients should be able to pay for advice knowing that there is no potential for VAT. In some cases there is a real risk that the VAT tail wags the VAT dog and I believe that advice (which as Harry states is subject to VAT) should be exempt from VAT. A client is thinking of retiring. If he says that and agrees to pay for that advice he will pay VAT. If he says I want to retire then VAT is not chargeable. What is documented in order to establish that VAT liability is not necessarily the client’s intentions. And of course the client may change his mind about retirement and keep doing his job….
    Should Harry use the word advice or should he use the word intermediation? Just a thought?
    P.s. Like the new site – my spelling is improving…..

  6. Sam

    Where did I mention VAT? I also don’t follow your remark about intermediation. Do you presume that all I do is arrange investments?

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