View more on these topics

Innes Miller: Is the percentage charging era finally over?

Proving value to the regulator means advisers will need to move to fixed fees and hourly rates

Scydonia director Innes Miller

The key theme running through the FCA’s recent business plan is value for money. As a term, value for money is highly subjective but it has important implications for advisers.

Since the RDR, we have seen strides being made by firms on pricing. Recognising that not all advice given to a client results in an investment being made has led the more progressive firms to introduce an hourly rate/fixed fee structure, or a mix of hourly rates and basis point charging.

But while efforts are being made by some advisers to deliver services for fees that accurately represent the work that has been undertaken, there are still too many examples of pricing structures that support cross-subsidisation, conflicts of interest and contingent charging.

For example, the basis points model is contingent on the client investing or staying invested. It is a legacy of a product sales driven culture that ties advisers to behaviours that may result in the client not receiving the best advice or value for money.

Charges in this model remain linked to portfolio performance, keeping it central to client conversations at a time when they may have other, more important financial goals that exclude stockmarket investing.

The basis points model also makes it difficult for clients to compare advisers on a like for like basis. Even where charges may appear to be the same, the quality and scope of service varies greatly.

There are still too many examples of pricing structures that support cross-subsidisation, conflicts of interest and contingent charging.

The transparency issue has been compounded by providers creating difficult to understand pricing structures designed to shield profit margins at a product and platform level. Intermediaries and end customers are then unable to apply pricing pressure due to opacity and complexity.

Given the recent clear message from the FCA stating its concerns that too many advisers are failing to deliver value for money, and that overly complex pricing structures are one of the factors behind a lack of competition, regulatory change is possible.

The FCA has always said it is not a pricing regulator and so it is highly unlikely it will impose limits on fees. What is conceivable, however, is that it could change how pricing is presented.

Pounds and pence

One option would be to show fees in pounds and pence only, eliminating basis points charging for advice. If this was to happen, the biggest issues facing advisers would be changes to their fee estimating or invoicing processes, which would have to include timesheet recording.

Some platforms and back office providers may be required to amend their functionality. The fee could still be facilitated by the platform or made directly from the client’s bank account.

Initially the change would be difficult but advisers would adapt over time. Clients too would accept it, as it would make it easier for them to understand what they were being charged for.

Some advisers claim clients are uncomfortable with this model due to concerns about “being on the clock” but they can overcome this by offering pre-agreed fees with a clearly defined level of service. Anything over and above this would be charged on an hourly basis.

No easy task

But while the FCA might seek to create the conditions to introduce greater competition, it may not be easy. Comparing advice services on a like for like basis is difficult, regardless of which fee model is applied. Individual client situations vary and different advisers often propose a different approach to the same case.

Buying advice is not like buying a manufactured product. There are a number of other factors that come into play when selecting an adviser, such as a personal recommendation, how comfortable the prospective client feels with them and the perceived quality of service.

That said, developments in artificial intelligence will, in time, create better value for money and help firms reduce risk in a number of areas such as portfolio construction and portfolio management. Many of the jobs undertaken that are directly correlated to the basis points model will disappear. When this happens, advisers will need to focus on the more complex aspects of financial planning.

With so much outsourcing already taking place, the basis points fee model becomes more difficult to justify anyway. Some will claim such a model is required to cover the risk of managing bigger, more complex portfolios but this can be addressed under the hourly rate model.

The adviser just needs to explain that more time and oversight is required to ensure the portfolio remains in line with their stated objectives and, for this reason, additional paid-for time is needed.

Advisers must recognise the benefits of adopting a more progressive pricing approach based on hourly rates and pre-agreed fixed fees to satisfy the regulator while demonstrating greater transparency to clients. Over time, it will help advisers show how they are delivering value for money and remove much of the unconscious bias linked to the increasingly outdated basis point model.

Innes Miller is director at Scydonia

Recommended

21

FCA review finds nearly half of advisers fail on disclosure

45 per cent either fail or unclear on FCA disclosure rules The FCA has released the results of its long-awaited review of advice suitability, with the vast majority of advisers coming out with a clean bill of health on suitability but failing to disclose charges in line with the regulator’s rules. The regulator first launched […]

10

SJP client wins redress over ongoing advice charges

SJP ups compensation for client after she struggles to get hold of adviser despite paying ongoing fees A client of St James’s Place has won redress after complaining she was charged for ongoing advice but had only met her adviser twice in five years. Sue Preece-Murray told The Sunday Times that ongoing advice charges from […]

FOS principal reveals keys to defending complaints

The Financial Ombudsman Service has reiterated its advice to IFAs to make suitability reports as tailored and personalised to the client as possible. Speaking at our Money Marketing Interactive conference today, FOS principal ombudsman Richard Thompson outlined how advisers can best mount a defence at the FOS when faced with a complaint. Thompson said: “The […]

Japan: mid-year review and outlook

By Chris Taylor, Manager of the Neptune Japan Opportunities Fund H1 2014 Economy: after a harsh winter that slowed activity in the economy, the main event of the first half of the year has been the debate over what impact the 1 April VAT hike from five to eight per cent would have; we are […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 21 comments at the moment, we would love to hear your opinion too.

  1. I refer Mr Miller to the MM answer I gave a few moments ago.
    I know, lets take something that works really well for most Clients, pretend that is not working, and try to make everybody use a system that does not work for most Clients.
    Pah!

  2. All very well but if it isn’t broke don’t fix it. Estate Agents have for years, and continue in the main to charge percentage basis for the sale of probably most peoples largest asset, is that fair?

    Clients tell use they don’t mind basis points charging provided it is value for money and the adviser is adding value in all areas of their affairs for the greater good of a better outcome. How often do IFA’s query, probe, identify opportunities and help clients manage tax returns, benefits and management of cash accounts without charging….If they are doing their job well, plenty, because not many clients would pay for that and the fee often doesn’t warrant the time. What experience shows is that many clients wont see an Accountant or Solicitor for the fear of being on the clock and having to pay ‘by the minute’ to query quite often complex situations they don’t understand. Knowing they can ask their IFA without the pressure of being on the clock and receiving information in an easy to understand manner is something you can’t put a price on.

  3. Steven Burley 25th May 2017 at 3:54 pm

    Nice article.

    Just had a quick look at your website. Can you tell me how much you charge for your service ? Just so that I can compare your charge to that of other consultancies on a like for like basis?

    It wasn’t very clear from your website.

  4. Well I guess I must be one of those dinosaur regressive advisory firms then, Innes.

    Most of my clients are the ones advisers who tell the rest of us how we should charge (which actually means their way) wouldn’t go near. They wouldn’t pay the fees they would be charged. And they would probably be right too. The thing is, I don’t care how other advisers charge for their advice. It’s not my business. But I do resent being told how I ‘should’ charge my clients by ‘competitors’. Or accused of ‘cross-subsidisation’ by a regulator or government who derive all their income from cross subsidies. (levies, fees, taxation). I think that is rich in the extreme.

    But then again there’s always something to fix. Don’t worry about the annoying fact the its not actually broken.

  5. Dear God not another “Expert” telling everyone that the way they are doing it wrong or that method is at an end!!!!!! The only correct way charge is what works best for the adviser and client. The recent report from the FCA shows the huge majority of fees are product/platform facilitated so is contingent charging. Percentage charges seem to be the most popular way (by a country mile) in which advisers appear to get paid according the FCA.
    Not that I want to be judgmental but it looks like the author’s thoughts are at odds with reality (now there is a surprise – an expert is shown to be wrong). Regarding his question “Is the percentage charging era finally over?” ……. No appears to be the answer, backed up by recent evidence from the FCA. If Mr Millar’s firm charges a flat fee for whatever work they do for their clients, that’s brilliant I am happy for him. However please don’t tell us that we are all wrong as it is insulting

  6. Mmm… approximate quote from the article “the basis points (which presumably means charging %) model makes it difficult to compare like for like. Even when the charges are the same, the quality of service will vary”.

    So this doesn’t happen with hourly charge or fixed fee then?

    As has already been said, other professionals charge on a % basis, solicitors for Probate, estate agents etc, and of course the FCA, which while maybe not on a direct %, certainly sets its fees on a sliding scale using various factors.

    I’m retired now, so I’m not affected, other than as a client, and if my adviser is working on a % basis, the better job he does for me, the better he does for himself, so what’s not to like?

    I have to say I think he’s scraping the barrel with some of his arguments.

  7. Duncan Carter 25th May 2017 at 4:34 pm

    Just a thought but I don’t think we pay anything for Money Marketing but maybe we do and I just don’t know.

    Off down to the supermarket now for some free salad as its a lovely day here in the NW. I’ll keep an eye out for the price disclosure breakdown.

  8. 25 years ago, established my practice. From day one I used Prestwood software which included a time ledger facilities. Okay 1992 99% of my income was generated via commission which was recorded on the time Ledger and distributed to the client with the time spent on managing his affairs
    Within our terms of business client agreement, we stated any surplus income would be rolled over and offset against time chargeable in the next year
    I can recall at the time I received a visit from the then regulator who looked at a client’s file This client had recently sold their business and in that year, we have done a considerable amount of work. The balance and the clients account was over £20,000, which was a considerable amount now as well as in those days. One of the PIA staff questioned why I had not paid the client the surplus £20,000
    I replied that the client has known every step of our relationship (This client used my services for 18 years before his death in that period he never questioned how I was paid for the work on their behalf) Furthermore, the client had signed my agreement which had the clause about how I would treat surplus commission.
    This led to an investigation by the PIA legal team in whether I was treating the customer fairly or not. The reply from the legal team was that there was nothing wrong items business/client agreement. The main they commented that it was a commercial contract agreed by both parties and understood by both parties.
    I can see clearly Innes point of view and think his comments have some validity. He is perfectly correct in saying that the FCA is not a price regulator.
    The regulator today has published another Data Bulletin – May 17 although I have only scanned it. On 11 states that charges as percentage of investment value is typical charge method followed by fees per hour and fixed fees table 5 shows the initial is a minimum 1% to maximum of 3% and ongoing fees 0.5% to 1%
    If I was a regulator I would ask the question like what I was asked 20 years hence If a client has given you £300,000 and you take 3% – £9000 and 1% ongoing £3000 if the investment grows to say £400,000 then fee increase to £4,000 are you as an adviser offering value for money,
    The only way to do that is account for you time 25 years ago the time ledger in Prestwood was a single word. To day you can if you wish would put in more detailed summary
    Innes comment are a warning you that if habits are not changed the regulator will force changes upon us all.

    • James, I get your point but all of this is simply subjective. Time sheets and hourly fees lend themselves to rewarding inefficiency and slower working speeds. I suggest in your example above that the client in question would be rather pleased with the fees paid if he saw his portfolio increase from £300,000 to £400,000. This however may not be the case if it took ten years! As many people have said throughout this on-going debate, value for money is a very difficult thing to establish. I know I charge less than many of my competitors and I may use that as a competitive advantage when trying to win business, but I doubt many of my competitors would say they felt they were overcharging. In fact anything but.

      The last thing we need as a profession or industry is our regulator, who quite frankly has not showered itself in glory since its ‘original’ incarnation 30 odd years ago, to start deciding what is ‘value for money’. That must be mission creep on steroids. For goodness sake, they won’t even say a product is good or bad in advance, so how they could decide what is value for money is beyond me.

  9. Just what we need; another noisy preacher. Look after your own house man and stop bothering others with your lame opinions. There are probably more fee based advisers fabricating their hours than percentage based IFAs diddling their clients.

  10. This type of change won’t happen!

    I could tell you why, but it’s easier to point you towards the ‘large players’ and their influence, most of whom lean towards % charging; (he who pays the piper as they say…!).

  11. Here we have (Innes Miller)a person, who wants every one to know the good work he does for charity “anonymously”

  12. FCA and PI fee % of turnover – investment management fees and platform fees – % of capital value. I have a firm with 600 active clients. We charge a % and place ourselves entirely at our clients disposal. Meetings phone calls email – anything – we focus on service above all else and we succeed. No clients complain about the charging and all understand it. Enough said.

    • Under the transparent RDR process (well…!), the client pays for pretty much everything by way of the initial and servicing charges, including as you say, the many obligatory tariffs levied on us to remain in business and regulated and which are invariably charged on a % basis (which is probably just as well for smaller firms).

      Advice firms are like agencies and merely keep a percentage of what they charge the client, so the perception of earnings is certainly not all that it seems and does make value for money a laboured discussion. My clients are happy to pay for my part and tolerate the rest as a necessary overhead, but let’s be clear, the pips are squeaking and if a firm delivers growth and receives a % based servicing fee then it is one way, if not the best way, of offsetting the increases of everyone else in the delivery chain each year!

  13. Dominic Thomas 26th May 2017 at 12:48 pm

    I have to admit to being a little confused…

    I thought everyone HAS to put their fees in £ already, not just %…. in fact since RDR.

    As for regulator fees being easy to understand… they make utility bills look like child’s play.

    All of the arguments still fail to address the risk to the business – which I hear little about in a fixed fee or time based world.

    Yes I see a logic in a fixed fee approach, but those that do so are not being entirely truthful about this. £5000 a year may be fixed, but its also a %.. only shrinking the more you have.

    As others have said, charge what you like, if you dont add value, clients will make for the door. In many respects financial planning is more like a cash machine for the client… you pay X the advice adds value of x plus… a heck of a lot more some years (usually a high multiple of)…

    In short do you want to live and work in a time based economy or a value based one?… one has a future, the other… well, not so much.

  14. Hourly fees reward inefficiency and poor processes. I’ve seen firms operating this model deliberately set standard “minute budgets” that are far in excess of the actual time it takes to do stuff.

    Most decent IFA firms operating a % fee model will taper it for higher net worth clients, or may cap (or “fix”!!) their fees at a reasonable level for the service they provide.

    The fee itself and the method of taking the fee from the client are two separate things.

    Maybe if some of the cogitating experts had actually been IFAs at some point in their careers they would clock this.

  15. Having read all of this I think the community of authors – no exceptions – need to stop pandering to a web site that sets us all up against each other when the reality is – we all look after our clients very well and do a valuable job. We should ignore the hyperbole and allow this web area to become tumbleweed. Think it over. What good emanates ??

  16. When you charge percentage fees your larger clients or your less ‘active’ clients effectively cross subsidise the smaller or more needy ones. That’s not really providing them with ‘value’.

  17. AS happens so often it rather appears that our section of financial services live in a bubble.

    Stockbrokers and DFMs all charge by a percentage of funds under management, the Regulator themselves charge on a pro rata basis all this without soul searching or agonising – so why do advisers get in such a lather about it?

    • Because Harry – DFM’s stockbrokers and the regulator all provide exactly the same thing for the charge. Ergo it is value by design.

      Advisers do different things for each client ergo the charge should be bespoke. Why does a client investing £100k pay £3k for 10 hours work whereas a client investing £1m pay £30k for 15 hours work?

Leave a comment