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Nic Cicutti: Price is not all that matters

Last December I received a letter from my energy provider. I won’t quote verbatim from it, but suffice to say that I was offered a degree of clarity and transparency in respect of my electricity and gas supplies that had never existed hitherto.

Instead of the old, confusing system whereby this provider charged two separate amounts for my kilowatt-hours of energy usage – higher for the first X number of kWh and lower for the rest – I would henceforth pay my bills in a different way.

As of the start of this year, I pay a “standing charge” costing 26.09p per day. This is then topped up by a flat rate of 13.21p for every kWh of electricity we use and 4.128p per day plus the same flat rate for gas.

This new, transparent system is self-evidently much better for householders because we can now tell at a glance how much electricity we use.

The standing charge simply reflects the fact that any provider is required to maintain an infrastructure that actually delivers gas and leccy supplies through a complicated system of pipes and cables, right to my front door

Any similarities with the old system of dual kWh charges clearly shows my complete lack of understanding of what’s good for us. Desperate to find out more about this wonderful new system I discovered that, apparently, if you are a heavy energy user the standing charge works in your favour because you pay less per unit of energy. By contrast, light users are disadvantaged because the standing charges becomes a much bigger part of the overall monthly bill.

What a wonderful idea. Remind me, the next time I go to my supermarket, to insist on a lower set of charges because the chain I visit has to maintain its own infrastructure – lorries, buildings, computer system and so on – as distinct from the actual cost of the food I pay for at the till.

What about my ability to compare like with like? Well, not so fast: all the “Big Six” major energy providers operate different sized standing order charges. In effect, it’s a crapshoot out there, with the cost of both sets of charges oscillating widely, depending on how much providers want to charge. What this means is I’m no better off with this new system of charges than I was with the old one.

I was thinking of this Brave New World the other day, as I read Chris Gilchrist’s column in Money Marketing, calling for greater clarity and transparency with regard to how they structure their fees in the post-RDR world.

Chris argues that there are two ways of looking at the issue. “One is that as in any other service industry, advisers will naturally seek to break a large fee into smaller bite-sized pieces to make it more acceptable to clients.

“The other way of looking at it is the rather more cynical view that those scales of percentages bear a surprisingly close relationship to the old commission scales the product-floggers used before RDR.”

The problem, for Chris at least, is that all the different methods currently used by advisers to create their fees are more likely to lead to confusion among savers than clarity. Ironically, he adds, the cost of implementation is actually lower than the bill an adviser might want to charge a client for advice, which rather tends to undermine those who want to charge to apply the decision.

Chris concludes: “It will take the media a while to get their heads round how to compare adviser charges, but they will.”

I sort of agree with him on that, subject to all sorts of caveats about how stupid so many of us really are when it comes to adding together all the disparate elements of an IFA’s charging structure.

But it strikes me that Chris is missing one vital point in this equation, namely that price is not always what really matters when one goes to see an IFA.

When I compare prices between energy providers, I know that – ultimately – I am trying to match the cost of a given item that all Big Six are capable of supplying. Indeed, in every case my gas and electricity comes through the same pipes and cables.

However, when I visit an IFA, what I am looking out for is something less immediately tangible: I am looking for an adviser’s ability to make sense of the financial world and offer me genuine advice as to what I should be doing next.

When I compare IFAs, it isn’t necessarily prices that I’m looking at. What I want to know about more than anything is service, particularly the ongoing once-over that my financial adviser will provide at least once a year when my products are reviewed and we decide what next steps to take to maximize my earnings. And there are plenty of advisers who will be claiming to look after that specific need – with fees nowhere near as important as an ability to do the job properly.

Which is why, important though Chris’s analysis is in terms of pointing out how some advises hope to bury their charges, he is also too “pessimistic” about the impact it will have on consumers. I predict many more happy years of hidden and poorly-understood charges from this sector.

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

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. RegulatorSaurusRex 21st February 2013 at 11:45 am

    “my financial adviser will provide at least once a year when my products are reviewed”

    Dear Mr Cicutti

    You have products? Has your adviser not explained that he is a holistic financial planner rather than an arranger of ‘products’?

  2. Incompetent Reporters Award Team 21st February 2013 at 1:59 pm

    Not interested in your electricity bill Nic.

    People buy people they trust and should never be based on cost only as you say. So have you changed your tune? Or just trying to fill editorial space?

  3. “It will take the media a while to get their heads round how to compare adviser charges, but they will.” –

    That will be when they realise that, for most people, it’s more expensive to get any form of financial advice and that the regulators should really have some form of commission system in place just like solicitors and accountants ;>)

  4. Let me get this right:

    After intervention from the energy regulator, government, the media and consumer groups your electricity bill is no easier to understand than it was before even tho’, theoretically, it’s a much simpler service.

    I’ve commented on this before (and still not received my bottle of wine BTW) but given the above in an arena with half a dozen players and two products, how do you expect more clarity and simplicity from the plethora of organisations, structures, specialisations, products and yes, vested interests, that exist in financial services?

    I agree it’s no easier to compare services than it was before, arguably it’s harder so that’s a fail then.

    Maybe it’s a work in progress Nic?

    If so it’s been in progress for an awfully long time and is destined to keep an army of regulators, politicians, consumer groups and media types in gainful employment for many more years to come.

    In conclusion I think you’re right but I would add that clients who come to a service based on price alone generally leave for the same reason.

    Oh and big supermarkets benefit from economies of scale so theoretically they can sell you a tin of beans for less. It’s that model in an online financial services form that will first take up the slack, then rapidly overtake the traditional advice route for most people in my opinion of course.

  5. RDR new world.

    For the first time in 11 years of being an IFA, I have had a new client referral direct from a local Bank… the gentleman is a pensioner who went to Halifax about a Shares ISA as his Cash ISA is so low paying – he only has a few thousand pounds and the branch gave him my details! Thanks!!!

    I’m seeing him and v much doubt a Shares ISA will be recommended – indeed I doubt I’ll charge him anything but might sign post him to a better Cash ISA provider.

    Clearly it looks like the banks will be turning away ‘small fry’ and directing them to IFAs post RDR.

    I won’t be able to help many sadly and given their criteria is reportedly £100k min investable, I’m expecting to have to say ‘no sorry’ to quite a few of their “referrals” by the look of it!

  6. ‘…..when my products are reviewed and we decide what next steps to take to maximize my earnings. ‘

    I am not sure that’s what we do at a review Nic. In our case we look at your financial planning. We do look of course at how your assets are arranged and how you are using your income but ‘maximising your earnings’ isn’t on our agenda I don’t think unless I misunderstand you.

  7. Duncan Disorderly 21st February 2013 at 9:57 pm

    I’ve read this article twice and can’t seem to find any references to Alan Lakey.

    What have you done with the real Nic Cicutti?

    Take it easy y’all.

  8. Someone above said “the regulators should really have some form of commission system in place just like solicitors and accountants”

    There is, it is just called and adviser charge/ fee and expressed as a percentage and either deducted from the investment or paid directly to the advising firm. The only difference is that the providers do not control it, but did not reduce their AMCs accordingly, which is the real rip off.

    The long term effect of front loading “fees” will actually be beneficial IF the AMC is reduced by the amount that the providers would have had to account for as procurement costs.

    That is unlikely to happen.

    Poor damned consumer, damned if they take advice and pay for it or damned if they try to DIY and screw up.

  9. Well Nic, I can see plainly that if you were an adviser you would ‘pad out’ your chargeable time with nonesense about electricity tariffs and then give little advice for your fee. In other words, your column is easy money, eh?

  10. Good comments Ned. If only the rule makers thought so logically!

  11. I too read the article twice and wondered what had happened to Nic’s usual snide pot-shot at Alan Lakey.

  12. I think this just about sums it up.

    “Common Law of Business Balance”.

    “It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money — that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot — it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.”

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