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Neil Liversidge: Fair ongoing fees for advice

Neil Liversidge MM blog

More than one journalist has criticised me over the years for comparing financial products to products such as cars and household goods. Clients do get it, however, which suggests that I am more in tune with what they want than are my critics. Those who can do, those who can’t teach.

Just after Christmas three things happened within a week of each other. First we had our six-monthly compliance visit by Simply Biz. Next we had our gas boiler replaced and on the day the plumber came I participated in Radio Four’s Money Box with your friend and mine Paul Lewis.

The subject under discussion was pre-RDR trail commission and post-RDR ongoing adviser fees. Paul was on his usual hobby horse about trail supposedly being unearned.

During our compliance visit we discussed our post-RDR charging model which is the same as the pre-RDR version.

Typically we charge 3 per cent initial for investments up to £250,000, reducing on a sliding scale thereafter, with an ongoing adviser fee of 0.5 per cent pa.

We have operated this model since 2004 regardless of the investment type. Oeic, Isa or Sipp – it’s all money.

Probing us professionally as he does, our compliance officer asked what we would do if a client just wanted us to build a portfolio for him and then walk away, i.e. not agree to an ongoing fee. My reaction was that we would say thanks but no thanks.

He then asked – so what if he wanted to invest £100,000 – would you turn down a £3,000 fee?

I have to confess to pausing for a second – but only a second. The answer was yes, I would still decline to act.

Why? Because a client who needs advice to invest £100,000 is still going to need advice some months or years down the road when the Euro implodes or interest rates rise or North Korea’s leadership gets even more stroppy and psychotic than usual.

Sure, some clients may say they do not want ongoing advice and service, but you know what? When the viscous waste hits the fan they will sure want it then. I never want to turn away a client with the words “You chose not to pay for our service so I can’t help you”, and we all know that any client who does hear such a message is likely to allege that the investment was mis-sold in the first place.

Paul Lewis, of course, would probably argue that we should just quote a one-off fee when the clients asks for service.

In that event the only realistic fee would be an amount equal to all the ongoing fees we would have earned had the client not opted out in the first place. Which is about what my plumber would charge me if I’d not had my boiler maintained and it went pop.

As it is I’m paying £70 a year to maintain the warranty – 5 per cent of the purchase cost. If I do not have it serviced, the repair when it is needed will be a far more expensive matter.

Fair ongoing fees for advice and service make sense. Paul Lewis may think otherwise, but as I say, those who can, do, and those who can’t teach.

Neil Liversidge is managing director at West Riding Personal Financial Solutions

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. Neil
    This is the first time in 23 yrs as an IFA I have heard anyone in our industry state in such eloquent and simple terms the realities of running an IFA practice and why we should all be aware of the publics inability to comprehend that ongoing services and the continued existence of a practice needs to be paid for by the clients who at a moments notice want to use our services.

    I think your fees are a bit steep at 3% of 250K, but what the hell if they have that sort of money then they can afford to pay.

    Good on you for telling it like it is.

  2. Neil F Liversidge 2nd April 2013 at 11:44 am

    Cheers Ned. Actually we often charge less for a £250k investment; it just depends what else we’re doing, plus our annual charge is only 0.5% with a written ‘no churn’ guarantee which means clients pay zero for fund switches, bed and ISA transactions etc. The FSA bod loved it when we had our TCF assessment.

  3. Agree wholeheartedly Neil isn’t it a shame that such a simple message seems lost on your average media pundit?

  4. It’s a pity you are so antipathetic to Paul Lewis. True there are journalists who are rather clueless, but in my own experience this doesn’t apply to Paul Lewis who is one of the more erudite members of the financial press.
    It is of course human nature to castigate those who criticise us and laud those who praise us – it is perfectly understandable. But in the instance that you mention (and I did listen to the broadcast) I believe he was referring to the advisers (far too many) who do bugger all for the funds under management charge. You of course arte quite right in so far as if the charges are explicit, transparent and declared upfront before commitment, then it is purely a commercial arrangement between you and your client and any subsequent criticism of that is somewhat irrelevant

  5. Hear hear ,some sense at last from a working IFA ,pity the regulators don’t seem to understand this simple model.

  6. I like the straightforward, simple approach. It is just money, so why complicate things further, irrespective of how much they have. I also like the confidence in the fact that a client wants half a job doing, should not be encouraged as it would end in tears.

    I think comparisons to plumbers and cars, etc. work really well as an analogy to the real world people live in. To carry on that theme, would anybody ask for half a house building or just the back of their car servicing!

  7. This is very true and I was reminded of a situation about a year ago when a teacher approached us for investment advice. I explained our process, fee structure and how reviews were integral.

    He liked most of it apart from the fee bit and proposed we work on a performance basis, say receiving a percentage of growth at the end of every five year period.

    He looked at me as if I’d gone mad when I suggested that he may want to work for nothing for five years and then be paid based on the results his pupils achieved in their GCSEs but that wasn’t an approach we cared for.

    We didn’t engage with him funnily enough!

  8. I can see the points that Neil Liversidge is making from an advisers perspective. However, there are two sides to every story. From a consumers perspective what does this on going service consist of? Perhaps a half yearly valuation and if required re-balancing of the portfolio. Assuming the ongoing charge is 0.5% and the portfolio is worth £100,000. The charge is £500 for producing a few computer printouts. Does that represent good value for money? In my opinion it does not. Obviously if the client requires a meeting with the adviser this needs to be paid for. However, I am sure that most consumers would rather pay for this as and when required as opposed to paying an annual charge. The cost of servicing a £250,000 portfolio is no greater than the cost of servicing a £100,000 portfolio and yet the charge is 2.5 times greater. From a consumers perspective this cannot be fair. Obviously you could say that the consumer knows what the charges are at the outset and as such they can take it or leave it. However, this misses the point of whether these charges represent good value for money.

  9. Anon@8.58 – in your simple analogy maybe it doesn’t represent value but that makes the enormous presumption that the activity you describe is all that is done. If someone wants this service then they’re better off going to the likes of Hargreaves Lansdown and paying their 0.5% or whatever and not bothering with advice.

    If a planning service is being offered on a retainer basis then it it is not just about the investment portfolio and a few computer print outs. Those who want a cheap service can have one but we find that a lot of clients value regular contact especially in times of turbulence and change. Then there’s the regulatory costs, staff, premises, IT, PI etc – where does value arise? Does everyone drive a cheap car, live in a cheap house or eat the cheapest food. Price of everything, value of nothing comes to mind.

  10. Neil F Liversidge 3rd April 2013 at 12:32 pm

    Anon@8.58 Don’t get the idea that I am trying to convince you or anyone else who doesn’t like what we charge, because I’m not. If you don’t want to pay, go away. We are not in the business of ‘converting’ people. However I’ll illustrate the point of using an adviser with another true story. A very good friend of mine who I’ve known around 30 years is an active investor. He’s not married and he spends most of every evening working on his portfolio, as he has for as long as I’ve known him. Just over seven years ago he wanted to give me £50k to invest for him. I actually convinced him not to do so because he thinks investment consists of trading in and out of stocks on a weekly and often daily basis whereas we are more long term. Instead we agreed to play a game where every time we traded on a fantasy £50k portfolio we’d give him a sealed envelope and he’d do the same with an agreement that at the end of the five years we’d both sit down together, open the envelopes and compare results. About two years ago we did just that. He’d actually done very well. Net of all costs and with our standard charges of 3% initial 0.5% trail he came in about 9% behind us which, for a non-industry self-taught investor I reckon as very good. However, his pile of envelopes took up three bankers boxes in my office whereas our pile took up one A4 envelope at his home and in between times I’d managed to stay married, father a third child, run my own business looking after £20m of investments and have a social life. I am not knocking how he lives or what he enjoys. I service my own Harley not to save money but because I enjoy working on motorcycles, but my car goes to the garage and I pay the guys there because cars bore me and I just want it to run. Similarly most clients want their financial affairs sorted for them while they get on with life. We provide that service and we make our charges clear up front, just like Doug’s Tyres and Maltkilns Body Shop here in Castleford make their charges clear when they fix my motor. Anyone who doesn’t want to use an adviser can make their own investments. Anyone who doesn’t want to use a garage can change their own tyres. Within the law however, how I run my damn business, is my damn business!

  11. Philip Spierling 3rd April 2013 at 5:25 pm

    @ Neil

    Fantastic piece Neil and I could not agree more.
    We operate along the same line, if you do not want to pay, whatch the door does not hit you in the arse on your way out.

    And you are right again, we can run our business anyway we like as long as it is within the la w and regulartory requirements.

    Great article, and. Great business’s sense,, love it

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