We were recently approached by a client who had been on our books for many years (although not very active) to conduct a financial review for him and his family.
He was sent our terms of business, which detail how we are paid, as well as a financial planning questionnaire to read and complete in advance of our meeting.
At our meeting, we discussed the basis on which we would work, what exactly he wanted from us and an idea of the work that we would conduct by providing him with our initial thoughts. At the end of the meeting, he reverted back to the subject of the manner in which we are paid and implied that he had reservations about paying in this way.
In common with increasing numbers of IFAs, we took the decision a few years ago to move to being fee-based. These fees can be met directly by the client or, if commission is generated, this can be used to offset the client's fee account.
He wanted us to include in our report a summary of his and his wife's pension arrangements. These consisted of occupational scheme benefits and employer-sponsored benefits and so we highlighted that such work would not generate any commission.
However, we noted that there was a glaring “black hole” in his financial affairs (more of which later) that could be addressed through the purchase of a commission-generating financial product. Any commission generated could be used to offset his overall fee account and any shortfall would be his responsibility. If there was a surplus, this would be retained and set against future fee accrual.
The mistake made here, however, was that I told him in the meeting exactly what the financial black hole was, highlighted the potential repercussions of his situation and told him how we could solve it. I gave away free advice.
This was a man with a young family who had risen to a senior managerial position and who, together with his wife, generated just shy of a six-figure annual joint income – his being by far the majority. They enjoyed a very good lifestyle that was provided through income, not through savings or investments.
However, the client did not appear to have considered what would happen if he suffered illness and his income ceased. He had never fully considered the implications of the fact that his employer, senior employee though he was, would only maintain his salary for two months in the event of absence from work through illness, thereafter reverting to statutory sick pay. In addition, there was very little in the way of savings or investments to provide some element of self-insurance.
After several weeks' consideration, I received an email from the client telling me that he was not comfortable with our charging basis and requesting that I do not undertake any work on his behalf.
From the response, I believe he was uncomfortable with us being fee-based, not with our level of fees or structure.
One lesson to be learnt is that in trying to highlight the value of our advice I had, by giving some away for free, actually devalued it.
The irony is that, set against many criteria, this man would have been an ideal client. He had the income to be able to implement changes to his financial affairs that would result in short, medium and long-term security.
However, it would now seem that he did not meet the most important criteria of all – respect and commitment to an advice process which includes accepting that advice must be paid for.
To me, this is one of the key benefits of being a fee-based business in that our remuneration basis helps to concentrate both parties minds as to the true value of the relationship. Whilst we still undertake a great deal of work that is not remunerated we are now more conscious of this and are trying to reduce the amount of such unpaid work. To not do so would be irresponsible to ourselves but, more important, to those clients who have paid for our time.
Tom Warwick is a consultant at Warwick Butchart Associates