Former president Bill Clinton came to mind when I read about the spat between IFA Promotion and the Forum for Fee-Based Advice. Gill Cardy – quite reasonably in my view – defended the definitions of fees used by the latter group by citing the FSA’s retail distribution review document as a source.
Clinton, as I am sure you will recall, stated that he had not had sex with Monica Lewinsky. We then learned that his definition of sex was rather restrictive.
Definition will be the key foundation of the new market that the RDR will deliver. Depolarisation failed miserably to police status, especially for those salesmen who were commonly referred to as partners, a clear attempt to confer an independent badge on those who did not have the right to wear it. Regrettably, the regulators never had the you-know-what to pursue this issue properly.
Having said all that, I do not feel we have the definitions quite right and I have even more concerns about customer-agreed remuneration which is heading towards being commission with a lick of paint.
Our hopes are best served by a distinct split between planning/advice and implementation. Ron Sandler suggested this unbundling some time ago and perhaps he was simply ahead of his time.
The major issue is that implementation is the only service that many consumers receive. My own firm moved to a fee basis in 1998. Luckily, I handle rejection well, so it did not dissuade me that only one in four engagement letters came back. We contacted those who declined our services and determined the weak points in our proposition and communications. That moved the ratio to one in three and now the non-acceptance of our offer is reasonably rare.
We then moved to separate out implementation, which simply aids the discussion as opposed to halting it in its tracks.
An ongoing debate surrounds assets under management where a percentage charge is applied. I accept that in some cases, the level reduces as the amount invested increases. However, some of the levels in place are well in excess of any value actually delivered.
Perhaps the debate needs to be fee-only versus fee-based. Commission is clear as long as disclosure is made more apparent.
My question is, where you charge an investment management or advice fee on a percentage of assets basis, can this realistically be determined to be a fee? Also, as many firms move towards the assets under management model and the market remains volatile, just how robust a model is this?
Should we not be charging on a client’s entire net worth, especially if we are focusing on estate planning? Even then, we need to consider the level of fixed fee we can charge. Not linking it to the value at risk causes disconnect with the fiduciary risk we are adopting.
As I said before, it is all in the definition. Aifa’s excellent Manifesto for Advice aligns perfectly with the theme for this year at the Personal Finance Society – the value of advice. We need to ensure that definitions are global and obligatory for all, otherwise all our attempts will be in vain.
As a man once said: “This ain’t no dress rehearsal – this is show time.” Unlike Bill Clinton, we need to be specific. More recently, I placed a small wager on John McCain. This does not represent my politics, just my gut feeling. After all, he seems to see the same need for definition as I do.
Rob Reid is managing director of Syndaxi Financial Planning