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Nic Cicutti: My concerns about fees

Guide to Bridging 2013

How much should financial advisers be charging for their services? And, in the new post-RDR environment, are many advisers simply substituting percentage-based remuneration, linked directly to sales, for the commissions they received previously?

I have been pondering both questions in the wake of two recent news items in Money Marketing. One reported figure from Apfa, the advisers’ professional body, states that the average hourly rate charged by financial advisers is £156, with pricing levels much the same since the introduction of the RDR.

The second story came from the FCA, in which chief executive Martin Wheatley was reported as saying that consumers have found charges given in percentage rather than cash terms confusing.

At its recent annual meeting, Wheatley indicated that the FCA’s survey of firms between February and April found a “dealing bias”, where advisers are paid only if people buy a product.

Wheatley continued: “There are some concerns about whether that is entirely compliant with the philosophy we have set out and it is something we will come back to.” The clear suggestion here is that the FCA’s philosophy is in favour of a fee-based approach.

Evidence supporting Wheatley’s argument came from a comment that appeared below the article about IFAs’ hourly rates, in which an anonymous adviser wrote that they carried out 15 hours of work on an investment by clients for which the 4.5 per cent commission worked out at £272 an hour.

If true, this is a scandalous state of affairs. It would show there are still advisers in the industry for whom the concept of treating clients fairly is anathema. But it is equally true that fees, by themselves, are not the panacea the FCA believes them to be.

Many years ago I was asked to offer assistance to a firm of City lawyers arguing a case before the High Court. The issue was one in which the expert opinion of a personal finance journalist was of specific importance to the legal argument being made to the court.

In the weeks that followed, I was asked to provide a long affidavit for the client whose case was being argued by our side; respond to a similar document from the other side; comment on the response to my original deposition; and complete other assorted items of paperwork. I also attended meetings at the solicitors’ offices in the City. Finally, I was contracted to attend a two-day court hearing, during which time I was not to engage in any work for other clients. Naturally, I was paid for this, regardless of whether the matter was heard.

As sometimes happens, the case was settled two days before the hearing was to take place. If it had not been, there is no question that the argument would have been pushed further up the legal ladder by both sides, boosting my earnings further.

Not that I was much bothered by this foreshortening of the legal battle, as I had done well out of the whole arrangement even by that stage. My hourly rate, billable in 12-minute slots, was in excess of £150 even then. This was a sum suggested by the solicitors who hired me.

After I sent in my first invoice, my contact at the law firm advised that I should be billing a minimum 12 minutes for every phone call.

This included those he made to me and even the cost of travelling to a meeting, not forgetting the cost of the cab itself, all rounded up to the nearest one-fifth of an hour. In the few weeks I provided my services to the law firm, I must have received 25 to 30 calls, each lasting less than five minutes but for which the minimum charge applied.

I will not go into details of my earnings from this work, but suffice it to say that it remains my biggest single earner of the past 20 years. The legal firm itself must have cleared hundreds of thousands of pounds for its services.

Ever since I have been highly sceptical of the argument that a fee-paid environment is the only way for financial advisers to demonstrate their professionalism.

Yes, fees are generally the fairest way of charging for one’s time compared with commissions, where payments can either grossly under- or over-estimate the amount of work involved. Fees are one way of demonstrating the absence of commission bias to a client, regardless of whether or not it exists.

But my own experience of the fee-based system as used by some solicitors is that they offer just as many opportunities for ripping off clients dressed up in a veneer of fee-charging moral rectitude.

The problem, I fear, is not that of fees versus commissions but of an institutionalised relationship with clients that is based on amoral cynicism: they are simply there to be milked dry.

Whatever post-RDR changes are introduced by the FCA, the most important must be to IFAs’ behavioural mindsets. Without it, effective regulation is doomed to fail.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 22 comments at the moment, we would love to hear your opinion too.

  1. Father O'Blivion 1st August 2013 at 8:19 am

    Bejesus, who wrote this for you?

  2. So what you are saying Nic is that as we have all pointed out in the past following the system employed by solicitors isn’t the best route?

    The problem with time costed fees is that it benefits the rich rather than the poor – is this what you are advocating?

  3. Martin Wheatley, if correctly quoted over this dealing bias nonsense, seems to be losing the plot. All businesses need sales to survivre and thrive. Where does he think profits of providers will come from if sales of their products are not forthcoming? Why does the regulator think they know better than the rest of the planet on what is good for consumers. Again we are speculating over a future event but basing this on previus experience and their statement that the RDR is not working in the way we thought it would I can see a situation coming where we have to charge a client for them to do nothing in some situations, because that is the best advice for them. If this ends up beingthe case and we find that clients will be stupid enough to pay then I for one will spend my next 17 years telling clients to take no action whatsoever and earn from them. Lower fees because their is no risk of being sued for bad advice if no regulated advice is given. Before any smart arse comes back with “Advice to do nothing can still be covered by FSA”. It cant I have checked and if you check their rules and read what it says you will see this is the case. If every other adviser does the same, eventually providers will go bust as will platforms and the banks and post offices and NSI will fliurish because advising people to put money on deposit or into NSI products is not regulated either. It is ludicrous. All the regulator needs to do is to demand a copy of of every firm’s proposition. If there is not a clear £ and Pence figure on there equating to their %age fee then make them put one on. It is already supposed to be that way. FFS let us get on with advising clients, selling products, meeting needs and creating wealth and stop all the constant interferring. By the way Mr Wheatley I have never yet met a client who wants to pay me for my time and effort if there is no beneficial outcome that leads to action on their part. That s the case in the huge majority of the population and the sooner you realise this the closer to reality you will become.

  4. I cannot entirely agree with you Nic and indeed you have taken one example as evidence that the fee system is corruptible. And by picking on one example you have overlooked other issues regarding hourly rates. You need educating.
    The FCA, Consumer Association and others such as MEPs are foolishly fixated with headline hourly rates. A client fee is linked to complexity, risk, scope of work and the amount. That will then determine who does the work – secretary, administrator, adviser, specialist consultant, director etc. So the actual rate the client pays can be £156 per hour or any figure down to say £80 per hour. You simply cannot shop around based on hourly rates. Period. Of course for one person bands it will always be £156 per hour! My advice to clients is sit down with your adviser, take advantage of the free initial consultation and get a quote or an indicative cost. And it is truly independent, no reliance on a product to facilitate the charge and works out a lot cheaper than 3% plus 1%.
    As for corruption – if recorded and presented correctly the actual hours worked can be presented to the client as evidence of the work involved and the client has every right to dispute the bill at that stage. And it can be used to justify why a bill is as high as it is. And advisers should not be afraid of adding items such as specific CPD / research to the bill – how many other professionals such as IT “gurus” learn on the job and charge you for doing so!
    And for our firm, fees and timesheets means that we can meet our capital adequacy requirement of £250,000 without a penny held in cash. Something which many commentators on fees v “commission” naively overlook.

  5. Good point.
    One size does not fit all.
    Why not give the CLIENT the CHOICE, fee or commission.
    Regulate commission with a 3% cap
    This would give balance to the polarised argument reguarding fees vs commission and enable the CLIENT to opt for what suits THEM.
    All very TCF

  6. RDR did not ban percentage based charging, in fact the only thing that RDR did was to force IFA’s to have a fee agreement signed in advance of work being done.

    IFA’s are trading businesses and therefore should be treated in the same way as any other trading business. If a solicitor is able to charge a percentage of an estate when dealing with probate why is an IFA not allowed to charge a percentage of an investment?

    I could give many other examples like estate agents, credit card companies charging retailers and many others.

    If the FCA moves to ban percentage charging then I would encourage the financial services industry to take the FCA to court on unfair business practises.

    RDR was about disclosure and making clients aware of what they are being charged in advance of advice. This has been successful in my view as no fee can be paid without a clients signature or authorisation.

    Maybe Mr Wheatley should pay more attention to fund managers or even discretionary management services, after all if you start banning percentage charging you have to treat the whole of the industry in the same way. That could effectively bankrupt some very large insurance companies particularly if it’s back dated like they’re trying to do with trail commission. Funds under management from insurance companies and investment houses will become worthless over night.

    Think before you speak comes to mind.

  7. Sounds like you were more than happy to be complicit in your nice little earner nic!
    According to the regulator & the media, advisers are damned if they do & damned if they don’t.

  8. The FCA should steer well clear of trying to tell advisers how to work out the cost of the advice they provide.

    My understanding of the FCA’s objection with % based fees is that clients don’t understand the cost. If this cost is quoted in pounds and pence at the same time then where is the confusion? Client knows what it is going to cost them and how it has been calculated.

    As has been mentioned previously it is up individual advisers to work out how much they can charge and continue to make a living. If this is done through % of funds invested or hourly fees then so be it.

    In my opinion the FCA can regulate how costs of advice are communicated, i.e. an industry standard illustration but they can’t dictate how the cost is worked out. As long as a client knows the cost in ounds and pence and agrees to paying it before advice is given where is the problem?

  9. As my old Dad said….

    “Advice costs nothing until you start doing something with it”

    So if we give free “advice” to a client are they in fact a client if they have not signed ToBs? Or are they just somebody we had a pleasant discussion with over a cup of coffee? Hmmmm

  10. RegulatorSaurusRex 1st August 2013 at 11:58 am

    Dear Mr Cicutti, I didn’t get past the first sentence.

    Advisers should be paid whatever remuneration their clients have agreed in writing.

    Now please run along and find something useful to do.

    Give your scooter a decoke for example.

  11. Sorry Nic, not wishing to sound rude, but isn’t much of what you’ve written simply STBO?
    Have we really overcomplicated everything so much that such basic truths need restating? The dark side of human nature means that in ANY industry no matter what system you have, whether its fees, commissions, marketing bonuses, facilitation payments, etc, the less scrupulous (even immoral?) person will bend things to their advantage against the client. In ANY industry. Sad, but it’s a fact of life.
    What matters more than any other factor, always has, always will, is the character of the person providing the service and the trust you can have in them, in ANY industry. It’s what all of us as consumers instinctively hope for whenever we want anything doing and it’s the same for clients looking for advisers. Number 1 factor. Every time. And frankly, what you pay for that is way less important than the risk of not getting it.
    Perhaps the reason we are so over burdened with rules is that the regulator believes they can impose “morality” through the rules?. You can’t. In ANY industry.

  12. Give me strength 1st August 2013 at 12:17 pm

    I hate this industry now

  13. The FSA ruled at one stage that commission was the amount the providers determined would be paid to the adviser; a fee was what was agreed between the client and the adviser. If the adviser decides to charge a percentage of the funds or whatever and agrees it with his client that’s a fee.

    I cannot believe the nonsense about clients being confused by being charged a percentage. What should we do, provide a calculator with every quote?

  14. The problem is that with the introduction of the RDR advisers are still able to hide the real fee. I would like to know how many clients of those deducting 8% from an investment know that to be the case. What does the “cost of our services” tell them? There should always have been a maximum commission, now deductible fee, of 3%. If a larger charge is required that can be negotiated and paid separately by the client. Without this there will always be rip-off merchants. These are the people who have got us to where we are and they need to be removed from our industry. Then the rest of us can get on with providing honest and really professional services.

  15. Interestingly the FCA will always find a bias to sell a product amongst firms that are paid for implementation because those firms will not provide advice if there is no product sale.

    Think about it Mr Wheatley…! When I worked on a fee for a product sale I dismissed any case where there was no potential sale early on.

    Now I charge fees I will work with clients where there is no product to sell.

    I’m not suggesting that my way is better, just that anyone with half a brain could see why you might see a bias with firms that are selling a product which doesn’t necessarily indicate any client detriment.

  16. 1. EU law almost certainly prevents the FCA banning % based fees, so I doubt this is ever a starter.

    2. The OFT banned the Maximum Commission Agreement, as a cartel in 1990. Please can some IFAs stop asking for it back – it ain’t ever coming back for that reason.

  17. So a man goes into a car dealership to buy a car and the car dealer recommends that the customer should walk more and charges him £10,000 for the advice, which was the price of the car. Client does not get a car and walk out as per the advice.

    Would you be happy with that Mr Weathley – I suspect not.

  18. Is nic paid a % dependent on the number of comments he can stir up?

  19. Were anyone from the FSA prepared to stoop to offering any measure of clarification on this or any other forum, I think you might find that s/he would write that the FCA’s philosophy is in not favour of a fee-based approach, at least not to the exclusion of all else. Rather, its philosophy (as I see it) is in favour of an advice based approach that is not dependent on or inextricably intertwined with the sale of a product.

    As long ago as 2000, I decided that I would no longer provide advice for which I would be paid nothing if the client decided not to proceed with my recommendations, even if that advice was that he [the client] would very probably be better off investing at least some of his money into an investment product rather than leaving it sitting in a cash savings account earning very little interest, almost certainly less than inflation.

    So I started to charge upfront report fees. Not very large ones, but enough to ensure that if the client decides not to act on my recommendations I will at least be paid something for my time and expertise.

    Such a system weeds out the time wasters who expect to be provided with advice without having to pay for it (to hell with them). Alternatively, it secures from an early stage at least a measure of commitment from the prospective client at least to make the effort to engage with the work I’ll be doing for him.

    There had simply been too many occasions in the past when I’d done the pre-sale work, only for the client to say Thanks very much, we’ll think about it and get back to you (not). I cannot see how that is a viable business model or, if the whole pitch from the word go is to sell the client a product, how the service to provided can be presented as advice. That’s how the banks have operated for decades past and now they’re finding that it’s no longer workable or acceptable.

    If what you’re selling is advice as opposed merely to products, then I don’t see how you can leave the payment part of the equation until the point at which the client signs an application form and writes a cheque to your recommended provider ~ assuming, of course, that that’s what the client actually decides to do.

    What with letters of recommendation these days having to be so cursedly long and involved, there must surely be a greater risk than ever before that the client will be put off by the very scale of the task of reading your report and decide that he simply can’t be bothered to read it, let alone proceed with your recommendations.

    A reasonable fee upfront can protect you against this.

  20. By the way Nic, in the real world, a phone call to us probably takes at least 12 minutes – drop what you are doing, pick up the new file, have the conversation, document it, add file note and set up further actions if appropriate. Then go back to what you are doing. Oh and add it to the timesheet to demonstrate to the customer what we do so that we can explain why our fee is as high as it is.

  21. Okay, head above the parapet. If I charged £156 per hour I would be unemployed, full stop. I charge £395 per DAY plus a percentage of sum initially invested on a reducing scale starting at 2% down to 0.25%. The daily rate reflects my time and costs, the percentage reflects the risk to my business because of the regulators penchant for retrospective regulation and complaint instigation.

  22. How contrary is Nic Cicutti?

    I had a client in my office, a few weeks ago, that I had effected and ISA for, with Skandia. It has made over 8.5% per annum over the last ten years but she was unhappy that I had received 0.5% trail commission over that period. Obviously a case of her being “milked dry” as Nic Cicutti says above.

    Have you ever known a so called journalist that is more inconsistant than Nic Cicutti? I am sure he thought the RDR was going to be a good thing.

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