In essence, the retail distribution review is forcing change in three areas:
- The level of qualifications and knowledge held by advisers
- Clarity of the IFA’s underlying business model
- How clients pay for the services they receive
So far, much of our attention has been on the level and format of the qualifications required. And rightly so. This is vital for those who will need to still be trading on January 1, 2013.
We are now seeing the focus moving to reviewing and challenging the underlying business models that IFAs offer. This is where the greatest reward lies and I am sure we will all see a lot more work in this area.
But the area I want to pick up on is that of the method of charging. Many advisers and firms seem to be saying that adviser charging is “just like fee offset and we do that already”. Well, “to a point, Lord Copper”, is my answer. I suggest there are actually four models of remuneration.
The first is pure commission. I recommend a product. You decide if you want to buy it. If you do, the manufacturer gives me commission. “Mr Client, for arranging this contract, this is the commission I am entitled to.”
The next is pure fees. I give you advice and charge an agreed fee for doing so. You pay me the fee directly. There is no question of being paid commission for generating a product sale. “Mr Client, this is the fee for my advice.”
The next is fee offset. This is a bit of a hybrid. In this model, I charge a fee but offset this fee against any commission that may be due from any subsequent product purchase. If the commission is higher than the fee chargeable, then the balance is refunded into the contract. “Mr Client, I am entitled to £5,000 commission, the fee happens to be £3,000, you don’t owe me anything, and I will refund £2,000 into the contract.”
In my experience, this arrangement is still generally reliant on a product being purchased. I see very few, if any, of these arrangements where a subsequent invoice has been raised and a cheque received.
In short, there is usually no payment until a product has been purchased.
Adviser charging is clearly related to this mechanism. This will entail a fee being agreed with the client, which can still be a percentage of the assets to be invested, which is then payable whether or not the client goes
We spend a fortune on branding, so why not ensure we send tangible letters and agendas early in the process?ahead with the recommendations made. “Mr Client, the fee will be £3,000. How would you like to pay?” In other words, the client will see that there is no “entitlement” to commission to offset the fee against and that the fee is actually their money. Which we always knew, really.
The concern I have is that successful adviser charging is dependent on advisers working with clients to agree these fees much earlier in the relationship than many of them are used to doing. After all, the last figures I saw, back in September 2008, showed that over 80 per cent of the income into IFA practices was still initial commission.
I think it is no coincidence that the normal point that advisers agree their remuneration happens to be the first point that the client can actually see something happening. In short, we get paid at the first point at which the intangible part – advice – becomes tangible – an application form or contract note.
And there is our challenge. We see survey after survey which indicates that clients value the advice and the relationship. And I can understand that. But I do wonder if they are valuing the tangible because we are not as skilled as we could be at the rest of the process?
If we take the classic financial planning process, there are six parts:
1: Establish and define the client/planner relationship
2: Gather client data, including goals
3: Analyse and evaluate financial status
4: Present recommendations
5: Implement recommendations
6: Monitor recommendations
Clearly, we do most of our work for clients in steps one to four but get paid for steps five and six. I suggest we need to revise our process so the client can see as much value as possible in steps three and four. And that may require greater skills and positioning from advisers.
But mostly it requires thinking through what we are, what we do and where we add value and then reflecting that in our language and processes.
Let me give you some examples. We spend a fortune on branding, so why not ensure we send nice, “tangible” letters and agendas early in the process?
What about showing prospective clients sample plans, with nice colour charts and graphs. Properly bound. Again, something tangible. I accept none of this is new. It is just that advisers may be rusty in these particular skills.
We must put time aside for advisers to rehearse and practice how they are going to position the fee structure in future.
It is not hard or complicated but it does take time and thought.