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Nic Cicutti: The right price for advice

A few weeks ago, a friend of mine came home after a few days staying with her parents over Christmas to find herself locked out of the house. She had left her keys at her parents’ home several hundred miles away, none of her neighbours had a spare set and she felt unable to break in.

So she did what many harassed homeowners do in similar situations, called an emergency locksmith and waited for him to turn up. Two hours later, a dirty van chunters down her street and stops outside her house.

A scruffy geezer gets out, drills out her old lock, fits a new one, gives her two keys and hands her a bill for £185 plus VAT. She paid with a credit card – yes, he even had a machine to take her money – and he was gone. Total time spent in site – less than 25 minutes and that included processing her payment.

Daylight robbery, clearly (actually it was night-time robbery, but you get my drift). Apparently, these firms charge a call-out fee of around £50 and a half-hourly rate of at least £50 an hour, plus a hugely inflated cost for new locks and keys.

I mention all this after reading the survey in Money Marketing last week by CoreData, whose poll of more than 1,000 consumers found that half of consumers polled who are not currently receiving financial advice on a regular basis would consider using an adviser but would only be prepared to pay an average of £155 for a financial review. If charged on an hourly basis, consumers would be prepared to pay an average of £39 an hour for advice.

For most of us who have read similar surveys before over the years, none of this comes as a surprise. The value that consumers place on financial advice is frighteningly little, or so it seems. Indeed, according to CoreData, up to 10 per cent appear to believe it should be completely free, which is an intriguing thought. Maybe those polled believe that financial advisers are like church ministers, whose homilies also tend to come at no charge.

The reaction of many advisers also comes as little surprise. A large number will point to the way the RDR will effectively drive them out of business by introducing charging structures that consumers do not appreciate and will not pay for.

Actually, I prefer to look at this kind of survey in a slightly different – and more positive – way. First, let’s look at the remuneration issue itself. According to CoreData, the average amount consumers are prepared to pay is about £40 an hour.

Bear in mind that this includes people who have never used an adviser before, do not know what she or he does, the services they can provide, the preparation involved in giving that advice or the financial overheads they face in their daily activities.

In effect, what the people being polled have done is to take a look at a random individual in a suit and say to themselves: “Assuming I come to you for a particular service, how much should you be paid a year?”

Intriguingly, the figure they arrive to for a typical 40-hour week is something in the region of £75,000-£80,000 a year. Now, that’s not a bad whack for most white collar jobs, so it is hardly surprising that it was the average hourly rate respondents gave the CoreData researchers.

Contrary to the “I told you so” comments left on a number discussion forums where this survey has featured as a story, what this tells me is that advisers – and those who supposedly represent them – do not do a good enough job explaining what it is they do for the money they are paid.

Ironically, if you talk to any good, competent financial adviser, they will tell you that once their clients understand what is being done for the fees they charge, very few balk at the amount they are being asked to pay.

My second point relates to the first – what is it exactly that clients get from their adviser. In June last year, Aviva published its own report into the same subject, called The Value of Financial Advice.

The report quotes research from the Association of British Insurers, which found two-thirds of individuals (65 per cent) thought financial advice on pensions, saving and investments was worth nothing, with a further 25 per cent saying it was worth less than £200 per hour, the rate many advisers feel is appropriate in terms of their long-term business viability.

Forget for a second those who feel the £200 rate is not worth paying. What really concerns me is the two-thirds who feel the advice they receive is worth nothing at all. It goes without saying that some of those are mistaken in their view – the advice was worth “something”, regardless of how much.

But what is worrying is that in so many cases advisers somehow have failed to demonstrate any worth in their relationship with clients. If I were an adviser, rather than whining on about the RDR itself, I would want to ask myself why that is and – more important – what I can do about it.

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

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Comments

There are 19 comments at the moment, we would love to hear your opinion too.

  1. The question Nic that advisers should be asking themselves is why they are not re training as locksmiths. Sounds like a hoot compared to what we put up with. We charge north of £200 per hour, have plenty of clients and still hate the job as it has evolved. I very much doubt that the overall risk return picture for our business adds up at our charge rates when liabilities/long stops etc are all considered. Locksmithing looks like a winner to me.

  2. John Joe McGinley 27th January 2012 at 3:57 pm

    Nic for me the key has to be the confidence to package and communicate all the value that we can and do provide for clients.

    I work with many advisers on the RDR journey and you are spot on when you say that those who communicate and demonstrate value meet little resistance to fees.

    The problem is that we have an industry media that concentrates on the technicalities of RDR when we should compliment this with assistance on the softer issues such as clarity and how to communicate effectively the value we provide to clients.

    I find confidence in your proposition is paramount once you can achieve this the discussion with clients becomes less daunting.

  3. Price of Locksmith £185 plus VAT

    Value, access to secure and comfortable home

    Price vs Value see the difference?!

  4. Surely, all the “survey” reveals is that most people are not living in the real world and the lack of understanding about the cost of advice (and what is done) merely mirrors the lack of understanding about how big a pension fund needs to be to have even a modest retirement. You might as well ask how much for heart bypass surgery? or a trip to A&E? But ask how mucch for a car and suddenly there is a degree of understanding and a raft of follow up questions .. because it is familiar and has a context. So I’m with you Nic, the industry has done a poor job educating in this area and one has got to ask why so many value so little..presumably the penny has dropped though, when many advisers now talk in terms of active clients rather than filing cabinet upon filing cabinet of names that once bought something. The former can actually be served and engaged in a relationship, the latter – well there’s your answer.

  5. Nic, good thoughtful piece. Price is only an issue if your value is in question.
    The locksmith additionally gave your friend the answer to her problem which she could not resolve for herself.

  6. True story
    Call out charge for washing machine engineer £60.00
    Time spent -5 minutes
    solution – machine has given up the ghost buy a new one.
    This equates to £720 ph
    I think I will retrain but not for RDR.

  7. A similar situation presents itself when you are confronted by the “This withdrawal will cost you £1.80” at a cash point machine which charges. You know that you can walk down the street and get it for free but the machine is providing a service. It charges for that and the customer has a choice. Pay or don’t.
    What is wrong with charging £180.00 + VAT for the service that this skilled person had, at night, at Christmas, when he could have stayed at home. What has scruffy got to do with it. I dare say you would have been even more outraged if he had turned up in a Porsche in a sharp suit.
    For heaven sake Nic please tell us which way we should go. Fees or commission! Would you have praised the guy if he had turned up and charged your friend nothing if you then found out the lock providing company had paid him £500.00 for fitting the lock as his “commission”!

  8. Why would a grown adult leave her only keys at her parents and not have a spare set at all? Also the window breaking would likely have been less than £185 plus VAT. But taxi’s are double-fare so I would fully expect to be charged more during that period than what I would pay say in July.
    I agree with Nick Bamford on this – everything in life is cost versus benefit and you do the math!!

  9. Neil F Liversidge 27th January 2012 at 5:25 pm

    I have 3 golden rules which I comment to you all: 1. My charges are fair; 2. Because they are fair they are non-negotiable; 3. I only deal with clients I like, and, because I like them I am motivated to do my best for them. Life is too short to waste time on the vexatious. Over 32 years in this business I have learned that the clients who are most obsessed with price will never understand value and frankly, I really cannot be bothered educating such people; I would far rather spend my time on those smart enough to appreciate it. I find the Bo Peep doctrine works rather well. Once they’ve been screwed by the banks they come home wagging their tails behind them, sadder but wiser, and far more appreciative of what we can offer.

  10. Agree with most of the comments above but sadly it seems the only people who are prepared to pay for advice are those who feel they have a lot to lose if they get it wrong; People with a good level of disposable income or with a healthy asset balance – in other words wealthy. Average Joe has enough problems meeting the monthly bills and won’t pay anything much for a financial review so RDR simply pushes them towards Bank advisers and we all know the likely result of that so we’re back to a very much exaggerated 2 tier system. The less well off get screwed and the wealthy have a reasonable chance of getting appropriate advice. As advisers we fight over the pool of wealthy because the advice to the poorer is both unprofitable and not appreciated anyway. Good solution RDR, if the objective was simply to prevent any but the wealthy from receiving good advice and putting most IFA’s out of business as the pool of wealthy gets smaller in number (but higher in value as wealth migrates in its continuous path towards the mega rich)

  11. Good article Nic, and I agree. In my humble opinion, the biggest long-term challenge facing advisers is not RDR, or the FSA, or even the current adverse financial climate, but ensuring clients from future generations. With Google and Wikipedia and a wealth of “knowledge” online, everyone is suddenly an expert. Why pay an adviser to explain a product when a detailed guide is free online? Or why pay an adviser to compare and recommend a product when a website can give you list, ordered by cost or benefits or even by the providers call centre opening hours? I know why, and you IFA’s reading this will know why too, but does Joe Public?

  12. If which magazine gets it’s way we will all be charging £2.99

  13. Survey:- what price would you pay for one of Nicks horse’s arse articles.
    Our Survey said- Zilch
    Remember its Nick and all his Journo mates, with their sensationalist headlines over the years such as “commission hungry advisers”, that brought on RDR in the first place

  14. I think this is a far bigger issue than other spects of RDR (capital adequacy and qualifications) – advisers are going to have to have avery robust proposition with supporting collateral to clearly explain their value.
    Even on a CAR basis, taking 3% from a clients £100k pension pot for ‘selecting funds’ wont work in the brave new world. I predict challenging times ahead in 2013/14 for many.

  15. Joe Egerton (Justice in Financial Services) 29th January 2012 at 2:00 pm

    If £40 an hour really did translate into an income for an adviser of over £70K a year Nic Cicutti would have a point. But as somebody who has been involved in modelling the economics of advisory businesses (lawyers as well as IFAs) it is quite exceptional for the incomes paid to those who give advice to be over 66% of what they bring in and 40% is a reliable guideline. £39 an hour will sustain only slightly more than the national average wage (£26,000) a year.

  16. Great post Neil. I’m with you 100%. Our firm provides an intial consultation at our expense. If I end up in front of a ‘waster’ then it’s only half an hour of mine thyiem that’s been lost – better that than spending the next few years trying to please the unpleasable (and to make a profit from them at the same time).

  17. Spot on Nick and Neil.
    As for Richard Wright – just proves why RDR has to come in to rid such half wits.

    The major problem has always been advisers giving advice for free. Same with online blogs and articles. Give free information at your peril.

  18. The value of taking advice is built in to the consumer protection that investors have and cannot be quantified in mere monetary terms.

    The cost of providing advice has to take account of all the running costs of the individual business, Rent or Mortgage on premises, Staff costs, Heat and Light, IT costs and software maintenance, PI Insurance, FSCS Levies, FSA fees etc and that is before any Profit can be made from an advisers work to pay them a living wage.

    £155 per hour may seem expensive, but in light of how much it costs to just open the door is very cheap.

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