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Martin Bamford: Emerge fitter after RDR diet

I have been through something of a personal transformation since the start of this year. My New Year’s resolutions usually fizzle out by the end of January following a short burst of dedication and devotion. For some reason, this year was different.

I did want to be a little fitter but I have tried and failed to get into shape on several occasions before. Applying conventional wisdom to the challenge of dieting works for a bit until life gets in the way and old habits return. So what is needed is a dose of unconventional wisdom.

This unconventional wisdom came along in the form of the caveman diet. For the past four months, I have been eating anything I like, with the exception of grains and sugar. There has been no calorie counting and no “low-fat” ready meals.

There has been plenty of food such as fish, meat, vegetables and eggs. There has also been a bit of exercise, no more than 20 minutes three or four times a week. Until quite recently, conventional wisdom suggested you needed to exercise for an hour or more each time to get into top shape. More recent studies have found that high-intensity interval training is the way to go.

As a result of all this, I have lost 18 per cent of my body weight in the past 20 weeks. Last weekend, I ran six miles for the first time in my life. Unconventional wisdom works.

Just like this approach to weight loss and fitness, there is a danger that the IFA sector holds on to conventional wisdom without any real evidence it works.

It is time for a dose (or two) of unconventional wisdom. While there is no need to start with a blank page, we do need to let go of many of the old ways that have collectively failed us until now.

I accept it can be hard to let go of what has appeared to work in the past before embracing a new way of doing things. Not all advisers will be willing or able to make the sort of transition required to become professional advisers, selling advice rather than products to satisfy identified needs.

As we get ever closer to December 31 and the majority of advisers who plan to continue have satisfied the qualification requirements, the real challenge of creating a modern IFA business where clients value the advice they are buying will start in earnest.

Whether this is truly possible in the six months or so that are left is debateable. What does seem quite clear is that conventional wisdom will not deliver a sustainable IFA business model in 2013 and beyond. Just trying selling investment bonds at 7 per cent “commission” next year when your client sees 7 per cent of their hard-earned cash immediately deducted from the product.

The IFA sector is about to be placed on a radical new diet, where most will emerge fitter and stronger and a few will not.

Martin Bamford is managing director of Informed Choice

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. Nick – you are so far up your own arse – you don’t even know it! (as the moneysupermarket ad on TV goes!

    Only a T*** like you could come up with this!

    No wonder the FSA love it – you are doing there work for them!

    I despair at this sort of twaddle – with IFA’S left like this where we are all going to end up!

    Bankrupt i should suspect!

  2. I heartly agree with a lot of what you are saying Martin.
    However there still remains a downside for
    long standing clients of established firms like our own for whom we have provided a lot of advice over the years in return for trail commission on their overall ‘account’ rather than from individual products. They now they will have to pay us out of their own pockets as the provider of the contract that has been inforce for many years has turned off the ‘legacy commision’ and kept it for themselves. Our Standard Life Broker Consultant has admitted that Standard Life will retain the legacy commission that they cannot or will not pay us. Other companies will no doubt follow suit.
    It does rather look as if those who took high initial commission and churned contracts in the past have won out!
    Don’t forget that a lot of advisers do work for a lot less than a realistic hourly fee becuase they receive trail commission. That will stop and the client will end up paying more.
    The increasing costs of regulation will also pass to the client.
    The hardest thing is balancing business profitability with fair client service and always will be.

  3. Martin
    Obviously your considered opinions have a lot of merit, but I wonder, who claims 7% commission on bonds, many years ago I set my practices charge on bonds at the same level as Unit Trusts and ISAs etc.

    I don’t know how anyone would be able to justify 7% on bonds with any merit.

    The trouble with fee charging is that the time taken to perform services to clients needs to be so accurately assessed in order to maintain profitability that we risk losing the one thing we get from our clients, implicit trust and in future we may be seen to be fee hungry as opposed to commission hungry, because not much has really changed except that the providers will no longer be allowed to build into their charges a cost of commission, although Pru has stated they will be prepared to deduct fees from investments, but do not intend to reduce their charges due to the cost of implementing RDR.

    Where is the consumer benefit there I ask ?

    Service to our clients is an integral part of most IFA businesses, regardless of payment for advice methods, all the FSA has done, instead of putting into place a level playing field for commission payments via providers is complicate the issues of value for money, not improved it.

    As average adviser fees are around £120 – 150 per hour currently and set to rise on average by at least the amount the increased costs of regulation (16% forecast by FSA) and build in an element to fund the ridiculously unjust FSCS unlimited levies I can see our average fee costs per hour rising to well over £200 p h.

    I recently completed a drawdown plan, which by my estimate based on past experience would have taken a maximum of 10 hrs total work, agreed a fee of £1005 (gross before network %, expenses and tax and NI.

    The case took over 15hrs of my time, never mind administration time and in the final analysis was not worth it to my practice to accept such a low fee level.

    So out of the gross figure of £1005 which seemed reasonable originally, I estimate the profit is around 10% (100.50 after all costs deducted.)

    On that profit of course as a self employed person I will pay an additional 8% class 4 NI charge so the net profit for 15 hrs work is around £80.

    (£5.33 per hour )

    Not only do we need a radical rethink on how we charge, we need to ensure we now only deal with people who can afford to pay us.

    I find it sad that a major part of the ordinary working population will no longer be able to access our services due to the high costs of providing them

  4. What you don’t seem to realise is that commission includes a cost to the provider for marketing and distributing their product. Right from the beginning of disclosure commission was incorrectly described as “cost of advice”.

  5. @ Ned. The banks take 7% commission! Amongst others – not everyone shares your outlook unfortunately.

  6. Whilst there may well be a few ‘Atkins IFAs’ who thrive due to the RDR there will also be many whose poor diets cause financial rickets and fiscal scurvy.

    Many of these will not survive.

    I guess law of the jungle has never been so appropriate, although I would liken the RDR to Mr Creosote, where the eventual explosuve outcome will take agres to clear up.

  7. Abraham Okusanya 24th May 2012 at 12:27 pm

    Well said Martin. The problem of course is that a lot of IFA aren’t prepared to give up their ‘conventional wisdom’.

    A recent FSA thematic review of investment recommendations (GC12-06) ahead of the RDR revealed that 20% of the clients surveyed were given bad advice, 57% of the client files were so bad the FSA had serious doubts about the suitability of the advice and the shocking bits…. 6 out of 10 clients had been given inadequate information about the cost…. old habits die hard!

  8. Just back from a meeting with a referral who is earning £108000 pa. There are various needs that require attention and he is happy to pay a fee for my time. Whoop whoop!!!! I thought until we started to discuss terms. He nearly died off when I mentioned what I was going to charge him £165ph and it was likely to take around 20 hours to complete from start to finish. I confirmed that if it took less, he would be charged less but if it took longer, the hourly rate would have to apply for all of the work conducted. Whilst he understood the expenses we incur in our business and we have to make a profit, he was not willing to write me a cheque for the work that was to be involved for any more than the hourly rate he calculated for his salary (just under £59ph based on a 46 week working year) I told him if he can find an IFA to work for that he should use him/her. We then discussed commission as remuneration option and he was more than happy with this. Even at 1.5% + 0.5 trail (instead of 3 + 0.5) of all 8 PPP funds to be transferred plus commission for the £1500pm regular contribution (at 20% of usual rate) I am still going to be earning more than 2.5 times what the fee would have been on my hourly rate. He didnt even ask why the commission rate was so much higher than the fee would have been. He has signed the client engagement letter at the above rates. I dont know about being fitter after an RDR diet, a lot leaner (due to lack of bread for the table) yes, but fitter? No. I really fear for my future.

  9. Why do you fear for your future Marty? Nowhere under RDR rules does it say you must charge an hourly rate. If you want to charge 1.5 plus 0.5 pa then you will be able to. The only difference is you and the client agree the fee and the provider pays out that amount. No problems for you it would sound, given what you describe.

  10. Martin Bamford 24th May 2012 at 1:47 pm

    @Anonymous | 24 May 2012 10:51 am

    Thank you for your comments. IFAs are going to need to put pressure on the likes of Standard Life to ensure that product charges are reduced if ongoing commission payments are stopped. Surely that’s a simple matter of Treating Customers Fairly? It will not look good in the press when big life assurance companies are reported to be increasing their charges on legacy pension and investment products, because their systems cannot handle a reduction in charges when one element of that charge is no longer needed.

  11. Martin Bamford 24th May 2012 at 1:51 pm

    @Ned Naylor

    Thank you for your comments, Ned.

    We (unfortunately) see frequent examples of these high commission payments – and not only from the banks. In the last week I have seen an example of another IFA directing a client towards a certain provider because they pay 6% on an investment.

    You describe a proper assessment of client profitability as a problem with fee charging, but surely this is a basic principle of being in business? Under the old commission system, wealthier clients and those buying products are cross-subsidising the cost of providing services to other clients and those that don’t buy products. Is that cross-subsidy fair?

    Yes, we need to ensure that we only deal with people who can afford to pay us. What has changed?

  12. Martin Bamford 24th May 2012 at 1:53 pm

    @Ken Durkin

    Thank you for your comments, Ken.

    I agree that commission has always been poorly described and disclosed. It of course should have been explicitly described as being funded by the charges you pay on your investments. Describing it as some kind of provider marketing expense makes it sound detached from the pounds and pence actually paid for by the client.

  13. Martin Bamford 24th May 2012 at 1:57 pm

    @Marty

    Thank you for your comments, Marty.

    It’s worth keeping in mind that nothing in the RDR means that IFAs will have to charge fees for advice post 31st December. It is introducing ‘adviser charging’; there is nothing to stop an IFA from working on spec and then charging their client a % of the amount invested.

    Personally, whilst we do charge a project fee for advice which might or might not lead to product implementation, I am not a big fan of hourly rate charging – and neither are many of the clients we speak to.

    In the case you describe here, why not charge a flat fee for advice (£x) and then an implementation fee should the right thing for the client to do be to go ahead and transfer some pensions (x%)?

  14. man on the moon 25th May 2012 at 9:51 am

    @ Martin – well done on breaking 6 miles, get those 10k runs in every week and work up to half marathon. worth the effort.

    @Marty – like you I fear for my future as even though I am beyond level 6 I don’t have lines of eager mass affluent folk willing to pay for my time. I also had a similar situation about 12 months ago with similar clients who told me I would get paid by an ‘agent’. Charged a project fee from the pension plan instead or fee offset or ‘commission’. whats in a name.

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