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Helping Alan Lakey make the switch to fee-based advice

Last month, Money Marketing columnist Alan Lakey raised concerns about moving to an adviser-charging/fee-based environment and gave an example of a particular client he lost when offering a new remuneration model. The article led to a debate on the Money Marketing website, with over 50 comments offering advice and feedback. Here, two readers offer Alan some advice on making the switch.

Counting the benefits of a fee

Having worked in bancassurance, as a tied agent, and now an IFA, I promised myself when I set up my own practice in 2008 that I would always offer my clients the choice of how they would pay me.

The results have been quite interesting. I think it is worth remembering that what clients are looking for is value. When they go to their bank or building society, they do so because they believe that they will be getting fair value from the recommendations provided to them. They rarely quibble over charges. This is a big clue into how IFAs should sell their propositions after the RDR.

There are a number of steps I take with a new prospective client when making recommendations:

Try to discover whether they are considering advice elsewhere.

Lay out the “standard” fees or commission, alongside the fee structure I am proposing.

Demonstrate why my service is better – what can I give the client that they cannot get from their bank or building society.

Never assume that an existing client should be treated differently from a new prospect.

As an example of the effectiveness of this approach, I have lost only one client in three years and all my new business comes from referrals. I charge a 1.5 per cent annual fee, which some clients pay out of their investment and some prefer to pay by quarterly invoice. I charge no initial fee or commission on investments or pensions over £100,000. The clients really like this approach, as they feel that I am being incentivised to make their money grow – the larger their portfolio, the more I earn.

My clients get a review of their investments at least once every six months, and the performance of their investments has always been above benchmark. They also get a newsletter or client magazine quarterly.

Some IFAs reading this will question how it is possible to have time to take on this new client-centred approach and the truth is you cannot achieve this high level of service without segmenting your client base.

One of the effects of the new world of TCF and the RDR is that to provide the sort of service our clients really need and want, we have to be more selective about the type of client we deal with. In a few years time, the IFA community may well find itself only dealing with the “better-off”, as we will not be able to run our businesses any other way.

Who is going to pay me a £500 fee for advice on starting a £50 a month Isa? We all know the final results of all the current changes will be the less-well-off – those who need our advice the most – will be left to their own devices.

In the 20 years I have been in the business we have seen many changes and challenges, including the end of endowments, pension misselling, etc. But there can be no doubt we have all become more professional and if new legislation means we become better qualified and run our business with 200 clients paying us £1,500 a year rather than 2,000 clients paying us £150 a year, then surely that can only be a good thing.

I believe this is a great opportunity for the IFA community but we have to be better at demonstrating the value of what we do for our clients. A good client will understand.

Ian Head is managing director of Fund Management Ltd

Value, not price

The RDR abolishes commission. Well, mostly it does, because some protection products will still be able to pay commission but essentially the RDR replaces commission with adviser-charging, which some commentators describe as fees.

In fact, the methodology for paying amounts under advisercharging is the same as commission, in that such charges can be paid from the financial product recommended to the client.
The advantage of advisercharging is it is an amount agreed between client and adviser and is not influenced by the financial product provider.
For an IFA who has historically bundled advice and implementation together and has been remunerated by the payment of commission only if the client bought a product, the RDR changes nothing.

Imagine that today I offer my services for 3 per cent initial commission and 0.5 per cent trail commission. There is nothing to prevent me from offering the same service in the future, after December 31, 2012, and to charge 3 per cent initial advice charge and 0.5 per cent review charge.

I would not do that because I do not like the speculative nature of the approach. The approach also introduces cross-subsidy into the equation and I hate that even more, for cross-subsidy reads across to loss of profits.

The challenge, eloquently described in Money Marketing by Alan Lakey, is to demonstrate to a client that however you are going to charge them, they are going to get value for money. So the challenge of the RDR is not “clients will not pay fees”. They simply do not have to, they can carry on paying via the product if they wish.

If the approach to market is to complain that we have to charge clients because the FSA tells us we have to, then we should not be at all surprised if they refuse to pay. If our proposition is that we are going to sell them the best product or investment fund from the whole of market, then, again, I do not think we should be surprised if they say no.

What the RDR really does is to force change in the way in which the intermediary engages with the client. Put simply, it is all about proposition (forget client segmentation, which can only happen after you have a proposition). If I cannot convince my client that what I do is valuable, so valuable that they have to pay for it, then I do not deserve them as a client in the first place. And it is always my fault, not theirs. If a client rejects my proposition, that is simply because I was not skilled enough to articulate real and meaningful value to them and I should not seek to try and blame someone else.

Designing and implementing a valuable client-facing proposition is not easy – it requires effort. Presenting a valuable client proposition requires skill and practice. It is not possible to determine whether a proposition is valuable or not based on one client experience.

There is a difference though between commission and advisercharging and successful transition from one to the other cannot be achieved in an environment where it is pretended that either commission is a no-cost option to the consumer or where advisercharging is simply a device for replacing the commission that would have been paid if a financial product had been sold. There needs to be clear and unequivocal linkage between what we charge a client and what we do for them.

The consumer today wants a commitment to service like no generation before them. Quality of advice is a hygiene factor. To convince a prospective client to say yes, the modern adviser has to have that compelling valued proposition I spoke about earlier.

The beauty of the financial intermediary market is that this proposition can be different for just about every one of us.

We can bring the unique values of what we do as individuals and firms to bear on the delivery of great financial advice, financial planning, wealth management or whatever you want to call it. But it will require a different mindset to what went before.

Leaving aside the challenges inherent with the abolition of commission for regular savings, pensions and investment products (and leaving aside the argument about VAT), adviser-charging is, without doubt, about an even more transparent relationship with the client. Transparency is a force for good.

Nick Bamford is executive director at Informed Choice

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. RDR is NOT requiring advisers to charge Fees. CAR is not fee charging- It is not even close. CAR still perpetuates the product sale view rather than the advice view.

    The real reason why so many are concerned about CAR is simply that there is a fear that clients will be better able to see how much is being charged and may not be willing to pay.

    Tha market segment willing to pay more than £35 per hour is really very small and those requiring truly complex financial advice not much larger.

  2. A central point has been missed here.
    We are in danger of confusing two different things.

    If a client approaches me and states that he has £100,000 to invest and will I devise a portfolio then it is not a question of will he go ahead as that has already been decided. I can choose a fee or commission option and, as Nick rightly states, this can continue in a similar guise post RDR.

    However, in the instance that I wrote about the clients were asking for a plan which suggested they were unclear about their intentions and, naturally, I was not intent on providing four or five hours labour for no end result, thus the fee with commission-offset.

    The impact of the RDR is to highlight an existing problem and throw it into a harsher light.

  3. Ian, a slightly different alternative for you to conisder is to charge 1.5% on day on and then 1.5% per annum. If you were to lose a client after a short time at least you were paid for the initial work.

  4. Nigel Barker-Smith 2nd September 2011 at 1:23 pm

    Quite right John Blackmore, clients should be able to see that in many cases they are being robbed, role on RDR.

    Whilst I enjoyed Ian Head’s approach on how to create a business and its up to individuals what they want it to do and look like, in my opionion it’s dangerous to link your income to investment growth, especially when it’s out of your control.

  5. I remember when hard commission disclosure was a looming challenge but in effect as an adviser I became better off, it allowed me to discuss my fee openly and the value of my service, my client could compare if that was a focal point.

    I dont think advisers are going to struggle, as long as you continue to put your client first and adapt as required. I often waive my consultation fee if I sense the client would be better served by a different approach, and afterall thats what an advice service is about.

    True IFA’s have nothing to worry about and everything to look forward too, now if I can just get passed the trivia memory quiz then roll on RDR.

  6. @ John Blackmore spot on with your first part CAR (it is called Adviser Charging under the RDR has been for some time) is not fee charging. It works though for implementation but less well for advice (unless the two are bundled)

    Disagree with your view of the market size though whole rafts of different socio economic groups will pay fees but they have to see the value you offer before they say “yes”

  7. I’ve never really understood what all the fuss is about with regards to the change from commission to adviser fee as surely they are one and the same as illustrated in the article above. If your adviser who regularly does reviews and checks on the clients original objectives to see whether they are still on track, then I don’t think the changes to adviser fees will make any difference.

    If on the other hand you are one of those lazy advisers who does not to regular reviews don’t be surprised if you lose your client or you find that those clients’ switches off your income.

    After all we are in the service industry and surely those advises that provide good service will always end up doing quite well and RDR should be viewed as a way of weeding out the weaker advises.

    I think we will all have clients who will not need ongoing advice and therefore it may be more appropriate to charge those clients a one-off consultation fee with no ongoing service fee, with the understanding, that those clients will have to pay each time they want a review.

    For clients with larger portfolios particularly those clients with assets of more than £100,000 it is always prudent to have a regular review and therefore review charges of anywhere between 0.5% to 1.5% would seem appropriate depending on the number of reviews meetings per year and the amount of active management of the portfolio.

  8. @Nick I don’t think it has anything to do with socio-economic groups but rather with different market segments.

    There is a market segment that will not feel happy unless they are paying very large amounts – if the medecine doesn’t taste bad kind of thing.

    Then we have Investors Chronicle Man who would pay £5 per hour in fees.

    Unless you have seen other research findings I am led to believe that £35 ph is what most would be happy paying – the largest segment. If that is the case then most segments will either do nothing, go online, or go to a bank. Net result a lot of advisers either going simplified ( if the FSA ever reach a decision) or simply leaving.

    At present most clients have no idea what they are paying. Transparency will change all that.

  9. @ John Blackmore

    The only evidence I have I am afraid is anecdotal. Every single day we are seeing clients pay advice fees and as I have said before they are across a broad spectrum of client types. I remain convinced that it is about the proposition and the value that clients see in it.

    I wonder if we dare speak the unspeakable and suggest that the reason why many will not pay what we advisers consider to be the going rate is that frankly the average consumer sees little or no value in what the financial services sector does for them?

    The ABI did that research a little while ago and calculated that the average cost of advice for one single product was in the region of £760 and took up to seven hours to deliver. Perhaps this is the problem, maybe in the main the UK financial services intermediary is too expensive. Perhaps commission has masked how expensive the intermediary actually is. Maybe the consumer is recognising this?

    We can all probably argue that the regulatory costs of being in business are a signifcant part of that cost but perhaps the consumer is right and collectively financial services has been too greedy?

    A natural part of the evolutionary process is of course extinction. Perhaps it is natural that those intermediaries who cannot demonstrate value how ever they charge are faced with extinction- maybe the time is now?

  10. As I have said before, the industry is turned into a navel gazing exercise, as a direct result of the desperation to make sense of RDR requirements. The client is less important than the the process, because the Regulator forgot to ask the market what it wanted.
    Given that the FSA is a child of Gordon Brown, we can understand why it should engender such dysfunctional responses, and why it should be so out of touch with reality. Being guarded for 10 years by a Chancellor who had such great difficulty in relating to people as opposed to concepts, encouraged the FSA to operate on the same basis. Concepts may sound good, but they do not automatically provide good outcomes.
    Yet again advisers are debating about charging structures. Some talk about an hourly charge; most talk about a “commission type rate” based on money under management. In other words there is a need for a variety of structures because that is what a variety of clients require. But of course the process is more important than the client.
    Is there a possibility that adviser businesses too are becoming dysfunctional because of regulation? If you are an investment house, wholesaling products it may be practical to talk in term of proportional costs, i.e. a annual charge, because it is easy to assess and collect. [Whether the level of fees is correct is a separate question.]
    But advisers do not deal with blocks of money, they deal with people. They deal at the retail not the wholesale end, so the arguments should be different. I am not sure that they are.
    There should be a differentiation between service and product placement. Ignoring the administrative effect of the appalling administration of many product provers, the main service that an adviser provides is, I assume, service. Service rather than product placement is what is provided. That is what I appear to read in these blogs. Yet the adviser charging structure still appears to be heavily product orientated. it has been said before but bears repeating ad nauseam – if you don’t need a complete a fact find to buy a car, a house, or place a bet (investment!) on a horse, why is it compulsory when buying a financial product when advice is not required.
    What is more the pure product placer (historically called a broker) appears to in an impossible place, being forced to provide service whether requested or not, so competition becomes clouded, which is contrary to the terms of the FSMA 2000, but unless someone has a few million to waste on legal reviews the FSA will be allowed to pick and choose the sections it wants to use.
    The overall result is a debate that becomes dysfunctional because it is has to confront the dysfunction of RDR. Impose a fixed structure on a fluid situation and the result will rarely be that anticipated. The FSA could not cope with the fluidity of finance, so they have devised a process that allows them to function more efficiently. There is no evidence that it will allow them to function more effectively, as 25 years of incompetence have demonstrated.
    Nick Bamford is quite right in mentioning extinction, but remember that dinosaurs functioned extremely well for a few million years before a natural disaster caused their extinction. A dysfunctional FSA could well be that disaster for the adviser industry, unless advisers stop navel gazing and start to address some of the real world problems the RDR is creating.

  11. @John Blackmore – yes we might have Investors Chronical smart arse who wants to pay £5 ph, and likewise, some daft IFA who will advise for free expecting them to win the lottery and hand over everything.

    It is because we’ve had far too many fools, for far too long, NOT charging fees for their knowledge and experience that the majority of the public EXPECT advice to be free.

    Look at no-fee mortgage brokers. Need I say any more?

  12. Adviser charging, as it will be known post RDR, causes more issues than some advisers seem to realise. Prudential’s most recent RDR update has a section on remuneration, which points out some key issues for advisers taking ongoing remuneration from clients plans/investments etc. Well worth a read regardless of your views on Pru!

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