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Chris Gilchrist: Creating simple client fee bands

As we move towards the RDR deadline, and with many firms still grappling with their post-RDR propositions, we are asking advisers to share their charging models with the Money Marketing readership. Here,FiveWays Financial Planning’s Chris Gilchrist explains the model his firm has adopted. If you are interested in contributing to the debate pease email our head of news nicole.blackmore@centaur.co.uk

Chris Gilchrist MM blog

I have long predicted that following the RDR the advice market will polarise into a professional sector dominated by small and medium sized firms and a commercial sector of larger firms that will be restricted in practice if not in name.

Adviser charging is in essence an attempt to force commercial enterprises to adopt professional standards. As such it will fail. Those running advice firms as commercial enterprises will find ways round the rules so that they can place their own interests ahead of their customers. That is what commercial enterprises do, while professional firms place their clients’ interests first. This is well attested to in respect of culture, regulation and practice.

Ideally, if the FCA can see the wood from the trees, the term ‘independent’ would soon be confined to firms meeting professional standards. Bodies like the PFS and IFP could become professional bodies who chuck out members who do not cut the mustard.

Well, we can hope. In the meantime, those of us running aspiringly professional firms need to demonstrate that we are charging clients in a consistent and fair way. The old basis of percentages of investable sums clearly does not do this. It never did. Its aim was to permit advice firms to make egregiously large profits from wealthier clients which cross-subsidised services to less wealthy clients.

When establishing FiveWays Financial Planning last March, my fellow directors and I agreed to adopt a basis of monetary fees for initial advice. We published a fee band schedule on our website and give this to prospective clients at the first meeting. At the end of this meeting we are usually in a position to tell them which band their advice fee will fall into. There are five bands starting at £250 to £500 and ending at £4,000 to £8,000.

The bands are based on experience of the amount of work necessary for typical cases. We assess the case in detail once we are working on it and that determines the precise fee chargeable.

We initially tested the fee band notion with our professional connections. They love it. It is in line with the way they operate. They know it is not always possible to predict the actual time that will be taken on a case, which means that if you quote fixed fees at the outset, you have to set them at a level high enough to allow for this, the result being a tendency to overcharge.

Our fee listed in the fee band schedule is our fee. There are no additional fees for implementation, admin, research or whatever. Everyone knows that as customers we dislike having to grimble over a complicated schedule to try and work out what we will pay. Our clients like this simplicity.

Our ongoing service fees are percentage-based on the value of assets on which we advise. In this case, there is a rough equivalence between size of assets and costs of service delivery, especially in terms of adviser time – richer clients usually need and get more of it. We tell them this and they understand.

Our business plan and the P&l show that we do make a profit, yet we know our fees are lower than those of many other firms. We are ready for transparency and consumer comparisons.

Chris Gilchrist is a director of FiveWays Financial Planning.

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. It would appear that on one hand you are arguing that charging a % is wrong, but then it is ok to do so for reviews…. or have I missed something? Presumably your MI will report how close to the top of each fee range band your clients end up?

  2. @ Dominic

    You took the words right out of my mouth! If %-based charging is unfair, it is unfair.

  3. The 1% per annum ongoing advice fee more than makes up for any supposedly lower initial charge for implementation (wrapped up or not).

  4. Here we a go again advisers focused on method of calculation rather than value. If a client perceives what he he is receiving as valuable whatever the quantum and however it is calculated, he will pay it.

    If I screw up with a £10k investment my worst case is a compensation bill for £10k. If I screw up with £100k my worst case is now a £100k cheque. Banded or percentage fees will always have a place as they align with the risk of advice.

  5. so unless I am reading incorrect figures a £500 maximum fee for an Isa investment that works out at 4.4% plus the 1% annual fee. TCF and all that !!

  6. Peter Davies @ Create Wealth Management 25th October 2012 at 1:14 pm

    Chris, I applaud your fixed fee bands. However, like other comments above I cant quite understand how you prefer the work for initial advice to be fee banded rather than percentage based when your reviews are calculated on a percentage basis and not on a fixed cost. Do you spend twice as long doing a client review for a client who has £200,000 rather than a client who has £100,000 ?

  7. I think the article makes clear why we charge % ongoing: richer clients need and get more adviser time, which is the biggest cost in our business. This fee covers not just investment reviews but financial reviews including tax, allowances etc. so the time involved is uncertain and changeable. This stuff is much harder to anticipate than the costs of initial advice. It seems to me that either you do % and partially cross-subsidise (though of course really rich clients don’t pay 1%); or you have to have precise time charging, which itself adds cost; or you have a more complex fee menu and every additional bit of advice you give attracts a specific charge.Our clients seem quite happy with an ‘all in one’ annual fee, knowing they won’t pay switching fees or get extra bills for advice on ISAs pensions etc.

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