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Neil Liversidge: Would anyone use ‘hard fees’ if they didn’t have to?

Neil Liversidge MM blog

A well-known financial journalist in another trade paper recently endorsed the idea that no provider, including wraps, should be able to pay fees direct to any adviser. Commission on protection, according to the rant, should also be banned. The journo in question also writes for the Daily Mail which according to my friends in the FOS is the paper read by most of their complainants.

About 25 years ago, I took a couple of years out of financial services. I had started at Hill Samuel aged 16 and thought I should see what was outside the bubble.

I spent the first few months despatching until I realised that riding a motorcycle for work was destroying the pleasure I got out of my main leisure activity. I then went to work as a sales rep flogging insulation to builders and plumbers merchants against the backdrop of global warming and the warmest winter for 100 years.

Finally I fetched up at a fitted bedroom company in Leeds. Pretty soon I learned what credit control was all about.

We’d fit a bedroom costing thousands of pounds and send the bill whereupon customers would withhold payment and start game playing. Every possible reason would be conjured up as to why they should now get a discount. The fitter had supposedly turned up late, for example, or had got sawdust on the carpet or had failed to make a fuss of their cat.

Friends of mine in manual trades, I’ve since discovered, have the same problem. Once the bricks are laid, the paint is on the ceiling and the plaster is on the walls, you can’t really take it back. Dishonest customers know this and exploit it as a reason why they should not have to pay the full amount. As litigation is time consuming, expensive and uncertain, all too often they get away with it.

Financial advice, of course, is no different. Once the client has had it you can not take it back.

In my business we have had five complaints in eight years. Four only arose at the point where we asked the client to send us the fee due and in all cases the complaints only arose at the point where we threatened litigation if they did not pay. Three concerned mortgage advice fees of £295 each and the other a pure advice fee of £470 for some investment and trust advice.

None of the complaints were upheld, none went to the FOS and they all paid. I always litigate however small the amount. My success rate is 100 per cent. I believe in deterrence of the dishonest. The fifth complaint, in case you’re wondering, wasn’t upheld either, but that’s a story for a future column.

If advisers lose the facility to have fees paid by wraps and providers then that inevitably increases the cost to firms. It is not about disguising commission, it is about credit control. Increase our costs and the consumer pays more.

Where, then, does that leave the regulator’s underlying and undeclared, but very real, agenda of reducing advice charges and the still enormous protection gap? Where the law of the land is the law of unintended consequences?

Why do the exponents of ‘hard’ charging not take it a stage further? Fund managers could send out bills for annual management charges rather than deducting them from the fund. Reassurers and insurance companies could bill their premiums separately. And journalists, of course, could invoice their readers…

 Neil Liversidge is managing director at West Riding Personal Financial Solutions

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Comments

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

  1. paolo standerwick 22nd May 2013 at 10:39 am

    It was recently reported to me by main provider of investments and pension products since the implementation of RDR, hourly fees paid to an adviser in the main has not worked.

    Consumers paying adviser directly would drive fees down and as Neil says some probably wouldn’t pay. Without this credit facility how will IFAs pay the exorbitant regulatory fees which keep going up?

  2. Very interesting article from Neil and I agree with the sentiment 100%….

    We have always been clear on what we charge and why…. as such, RDR didn’t have a big impact (other than the hassle thrown up by providers implementing the legislation).

    We offer clients hourly rates or fixed fees and the majority prefer to work to a fixed fee given that there is certainty in the amount.

    In cases where there is an expectation there will be a financial transaction at the end of the advice, we offer clients the option to pay us directly or (unless tax is prohibitive) have it deducted from the investment amount. Again, the majority ask for us to take it from the investment.

    We don’t push them down any single route but the majority prefer to proceed on essentially the same basis as was the case ‘pre-RDR’ – i.e. an agreed advice charge deducted at outset.

    Given that this is ‘de-allocated’ and therefore clients clearly see the amount invested being reduced by our advice charge, I fail to see how banning this approach is in the client’s best interest.

    Change needs time to bed in – and given the ban on rebates and, subsequently, legacy trail, there is plenty to be dealing with as a result of legislation…. going back and changing what RDR introduced is probably unnecessary.

    I do, however, think that a close look should be given to life cover commissions given the impact they have on premiums and the lack of transparency as to the proportion of the monthly premium is being paid as a result of advice.

  3. Sorry to spoil your party Neil, but I have charged fees or over 20 years and I also charge fees for protection. My fee is invariably less than the outrageous commissions paid for life cover.When clients see the arithmetic and the savings over the term – even when my fee is included – it’s a no brainer. Perhaps why so many are in a blue funk about the prospect of having to charge fees for protection as they will have to forgo the juicy commissions.

    I have had one case that I had to refer to the small claims court. Outcome successful in my favour. We also give our general insurance clients the option to pay a fee.

    Your comments concerning fund managers and journalists although amusing are disingenuous.
    Basically if you can show value you need have no worries about charging fees. It is only when your services are considered worthless – then that is what the client is willing to pay – nil.

  4. Stephen Rowland 22nd May 2013 at 12:03 pm

    Any body who wishes to be paid directly rather than indirectly must be mad! I know all the do -gooders & holier than thou artist out there are going to be up in arms – but the simple truth is – with an Investment / Life Company (generally) – you at least know you will be paid!

    My dentist who went from NHS to Private (similar to our Commission / RDR scenario) now has to hire a manager at great expense to call all his Dental Debts in / invoke court proceedings for non-payment of fees!

    I know IFA’S will say that could never happen to them – as they get paid up front – but at least with commission, you were guaranteed payment with no bounced cheques & trying to wriggle out of agreed payments!

    Seems to me a retrograde step (payment wise) & when eventually it gets out IFA’S are maybe a soft touch as easier to let off than to take to small claims court (look at claims chasers who prey on easy pickings) – then IFA’S could rue the day of inadvertently having no commissions!

  5. I agree with Neil’s points and like the analogy of hard charging of fund managers, reassurers and journalists getting paid this way, which of course we all know (including Neil I’m sure) will never happen because financial advisers always have to be treated differently to the rest of the population.

    I disagree, however, with Harry Katz’s assertion that Neil’s comments are disingenuous, on the basis of his last paragraph. Sometimes People just don’t appreciate your value even when everyone else could see you have done a good job and I would say there are plenty of journalists and fund managers etc. who get well paid without demonstrating much value at all. I would like to see most of our politicians billing us directly!

  6. John Blackmore 22nd May 2013 at 12:50 pm

    “It is not about disguising commission”

    Do you seriously believe this or is this just spin ?

    Very few advisers, even now, charge fees. CAR is little more than commission dressed up to fool clients.

    I have no problem with Selling and being paid a commission or Advising and charging a fee ( paid directly by the client) but find the existing cozy relationship between adviser and provider using pretend fees to be far worse than either of the traditional options.

  7. When it comes to money the less honest members of society will always make life difficult for the more honest. Think of the house purchase that falls through because the seller agreed a price then the buyer came back with a lower offer half way through the process because they think the seller will have invested too much in the process to pull out (happened to a client recently). Think of the cowboy builder who takes payment up front then does a shoddy job and can never be found, there are a few TV programmes on this subject alone.

    In the main people will pay what has been agreed because that is how society operates. Neil is right that asking the client to pay directly increases the risk of non-payment but i don’t think it increases it significantly. Certainly not enough to worry about.

    @Harry Katz
    I’m glad that you have a model that works and can advise on protection through a fixed fee model but i firmly believe that removing the commission option from protection business will have a negative impact on the take up of policies. The very nature of insurance is that it is paid with the hope it is never going to be used and is ultimately a waste of money (hopefully). For this reason most people are loath to pay it, i have lost track of the amount of people who have told me the “don’t believe in life insurance”. I have seen people that would prefer to pay £8pm to insure their Sky+ box rather than cover their family for a similar amount. Adding a cost over and above the monthly premium that the clients actively have to pay will only persuade those who were waivering on the fence not to bother at all.
    Yes, premiums may be higher because of the commission paid to advisers but i think this is a necessary evil to allow more people access to protection products.

    As always, thats just my opinion. Feel free to disagree.

  8. Hi Harry

    You put forward an interesting point ? can I ask roughly how many of the protection clients opted to go with the commission route rather than pay you a fee ?

  9. Like the vast majority of IFA’s out there I am new to the concept of direct fees and from the start of the year have had to adopt it. I am not inclined to have to go through the legal bit so on the 4 occasions this year where a client has paid me directly, their cheque clears before I complete the advice stage or implementation stage. It clearly states this in my client proposition. Only one declined that way of doing business so I concluded the meeting at that point and said there was nothing I could do for him. He called me a mercenary bast*rd and left. My way solves any potential credit control problem and if only very few people refuse to work with me on that basis then I dont care about the refusers. I stress this is not the norm for me as 99% of the income generated via AC is by provider facilitation. I am happy and most clients are happy to do business that way.
    @ Harry K – well done for having a fee only model, I am glad to hear it works for you. I am interested in hearing more on this – would you be happy to disclose what your fixed fee for selling a protection policy? Thanks, Marty

  10. Incompetent Regulators Award Team 22nd May 2013 at 2:20 pm

    @ Harry Katz

    You are small fry mate.

    People in proper business have proper outfits, staff, processes and service. We don’t all work from our back bedroom!

  11. To Nick & DH

    Nick

    Like you I am perfectly relaxed about advisers doing what works for them. It’s just that I don’t much take to broad assertions that assume that one view is necessarily the right one, or that the whole world agrees with the view of the proponent.
    Personally I don’t push anything. I guess I’m lucky, clients come to me; I don’t have to search for them. That already is a great plus, because in approaching me, rather than vice versa the whole thing is on a different footing. They want to engage.

    I then advise. This takes the form of a fairly comprehensive report. Say for life assurance it covers the whys the wherefores, the options and the costs. If the client decides not to proceed they know from the outset that either way they pay a fee. The work has been done, any execution is merely admin.

    Accordingly I’m not preoccupied with the take up or whether or not the ‘public’ is under insured or not. That is for politicians, Quangos and Civil Servants. I’m not a campaigner or social worker.

    In answer to DH – no one opts for commission it is (so far) 100% fees. The arithmetic as presented in the report speaks for itself.

    This is not meant to illustrate that I’m anything special or a clever clogs. It’s just the way I work and if others want to do it differently I have no issue with that. Just so long as assumptions are not made that there is only one way and anyone not taking that way is somehow odd or daft.

  12. Thanks Harry

    Interesting ? the only reason I asked, was I offer Fee and commission on protection (much like I did with investments and pensions), however I have worked out although fee is a cheaper option around 80% opt for me to be paid via the commission route ?
    This leads me to deduce that the protection gap is just going to get wider and wider along with pension and investment/savings gap when commission is finally banned on protection biz

    But then, financial advice and products are not for the average man or woman now are they ?

    But as you say, that’s for the politicians, quango,s and civil servant’s to worry about

  13. @Harry

    Like Marty i’m new to the adviser fee model and i’m happy to see it working for some IFA’s.

    If i put my hand on my heart i’d have to say that i think the fee model is by far and away the fairest way to bill all clients for financial advice.

    However, the main negative of a fee model is that those with lower asset levels are unfairly penalised. The reverse of a % commission based system where those investing higher sums pay more for the same amount of work. My concern with protection products is that it tends to be those with the least in assets who need or want protection. For the reason mentioned above you can see how this would put some off. Quite often a fee just is not affordable.

    Maybe my opinion is a product of my background, i’m not used to dealing with HNW clients. I’ve recently made the transition from bancassurance to IFA. As you can imagine bancassurance clients in your average branch are not usually HNW. Well they weren’t in my branch anyway.

    I am prepared to be proved wrong but i can imagine the mandatory removal of commission from protection products would be disasterous for the take up of policies such as life cover, CIC and Income Protection. Policies that, argueably, all working age people should have or at the very least recieve advice on.

    As always, only my opinion.

  14. Interesting debate. The problem with removing commission on regular premium savings and protection as I have always said and Neik has identified is that the cost of advice is up front and those who need the advice for something with a regular commitment invariably don’t have the capital to meet a fee, unlike lump sum investment clients.

    Commission is simply a method of factoring the advice cost. Remove commission by all means, BUT replace it with an industry wide factoring system for regulated advice coordinated by a trade body (APFA or ABI) then there can be NO commission bias.

  15. Harry is a total clown.

    Just because he has clients that come to him. (Prob because he is as old as the hills and been around so long) he has the cheek to say we should all follow his route with fees on protection.

    Well Harry what about the postman and the cleaner who only have £100 per month DI left over? Are they going to pay me £500 for setting up a £20 per month life policy? Na didn’t think so

    I attract new clients by effective marketing. Commission is need to fund this properly and as previous people have commented at least I know I will be paid by the insurance company.

    If anyone is disingenuous its you. You make my blood boil with the crap you post on here and elsewhere

  16. Julian Stevens 23rd May 2013 at 8:28 am

    Except for those accustomed to taking commissions that are disproportionate to what they’d reasonably be able to bill the client for separately, I’m not sure what all the fuss is about when it comes to adviser charging, though it is of course much easier when facilitated by the provider. What’s wrong with 3 + ½% as a nominal benchmark? It can always be adjusted for larger or smaller investments which, anecdotally, is what most decent IFA’s seem to do.

    If you are a devotee of separate charging, the obvious methodology seems to be to get the client to write two cheques at the point of implementation and maybe wait for the one for your adviser charge to clear before despatching the one to the provider. If the one for your adviser charge bounces, then you take no further action on the other one.

    For new clients, I always charge a nominal upfront fee for my pre-sale work. If the client won’t pay, then walk away, because you know from the word go that you’re going to have trouble getting paid from that point on.

    Invoicing for ongoing services is almost certainly much more difficult so, for that, provider-facilitated adviser charging is pretty well essential. In view of all the clamour about customers who clearly need advice being unable or unwilling to pay explicit fees for it, I don’t think the FCA is likely to ban that.

    As for Neil’s analogy about builders not getting paid for their work, I knew a builder whose policy was that if the client wouldn’t pay for their work, he and his team would go back and rip out everything they’d done, including even new plasterwork.

  17. Jonathan, I suggest you re read harry’s last post where he say “I am perfectly relaxed about advisers doing what works for them. It’s just that I don’t much take to broad assertions that assume that one view is necessarily the right one, or that the whole world agrees with the view of the proponent.”
    How this translates into him dictating your charging model is a mystery.
    He is no clown I can assure you given your invective no wonder you have to market your services!

  18. Robert I market for my services as im in the business of attracting a large volume of new clients who have not bought protection before or are woefully under insured. I sell lots of PHI to the people who need it most.

    Im not interested in building a business with the odd referral from brian down the road (even though I do get the odd referral)

    The thing that pis$ me off about Harry is his assumption that its easy to charge fees to the masses. Harry is probably near retirement age and I still have 30 years plus in this business. Advisers have enough on their plate just now and a bit of solidarity would be a good thing. Their is nothing wrong with selling and being rewarded for it. After all this is meant to be a capitalist country we live in

    You have no idea about my business model so do not assume I market for business because I don’t get referrals

  19. I have nothing against selling it was your communcation style that fuelled my assumption, as to fees to the masses I agree as the cost of regulation makes it impossible to offer it at an affordable level.

  20. Raoul Ruiz Martinez 25th May 2013 at 8:53 am

    Before I write 2 words – very nice article.
    The 2 words are “morals” and “business”.
    All the best to all advisers who read this and fully understand.

  21. The choice should be the CLIENTS, one size does not fit all.

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