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