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Nick Bamford: Contingent charging scares off clients

I received a new enquiry by email this morning. It contained a statement from the sender as follows: “I have spoken to a number of advisers but I feel they are trying to sell me products rather than give me impartial advice. What I want is some proper advice for which I can pay a fee with no pressure being put on me.”

The sender provided some further background information. He is 55 years old and wants to retire as soon as he can. He has a medical condition that may shorten his life expectancy and, while he has two children, he has no spouse or partner. Among his arrangements is a deferred defined benefits pension.

On the surface, he looks like someone who could get real value from impartial advice, and he is willing to pay a fee for that advice. Why, then, does he feel the advisers he has spoken with are not impartial and that he is being sold products?

It could be to do with the adviser proposition. If the proposition includes the fact the client only pays if he buys a financial product, you can see why he feels advisers are trying to sell to him. This may also explain why he feels they are not being impartial. After all, what if he does not need a product once the advice has been formulated?

Experience tells me many clients are looking for something much more expansive than an adviser who is going to choose the best financial product for them. They recognise financial advice is something much bigger than that. This is not to say product selection is unimportant, by the way, just that it comes pretty far down the list of client wants when they engage with an adviser.

So, what does proper advice look like to someone like this enquirer?

Proper advice will include looking at his situation in the round, building a plan that encompasses all of his existing financial arrangements (not just his
pensions) and seeing if his needs and wants can be satisfied by what he already has.

He is certainly looking for the answer to one very big question: can he afford to retire soon?

He needs to be presented with the facts and shown that he can either retire now with a reasonable prospect of not running out of money, or that he needs to save more. Or perhaps lower his expectations about what is possible.

He needs to understand the advantages and disadvantages of any course of action that he takes, as well as any risks involved. It does not follow that he needs a new financial product, although the planning process will uncover if he does. As far as his DB pension is concerned, we all know there is a lot of advisory work to be done there.

I think this prospective client may well have been put off by contingent charging. Perhaps he feels this is why the advice that has been propositioned to him so far is about product and not impartial.

Nick Bamford is executive director at Informed Choice

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Comments

There are 41 comments at the moment, we would love to hear your opinion too.

  1. Well said. If you want to be and appear to be impartial as well as independent contingent charging is not the way. Also to protect your profits and get paid for all you do just charge for all work: not whether a product is bought.

  2. Rubbish, you sound like a goody two shoes.

    If he is a shopper let him shop around as that’s is his prerogative to do so and that’s why RDR came into effect. In the end he’ll get what he pays for. If he is not prepared to pay the going rate then I wouldn’t want him as a client anyway. He sounds like trouble to me.

    I have thousands of clients with many millions under management and they are happy to pay a fair price. As one client said to me once, so long as I am getting a good deal, you make money, the provider makes money then that’s OK. One only needs one of those to go wrong and it’s no good to anyone. If clients weren’t prepared to pay the going rate, then who would prop up the regulatory fees, Father Christmas?

    • But I am a goody two shoes well spotted

      • I would put my house as a bet that if you look at your new business book you will find a few favourites in there. And I expect it too because spreading too far just to ‘appear’ to be really independent would be an admin nightmare and as all experienced advisers know some companies may have great products but bad service.

        There are 3 types of advisers pre Mifid 2018:

        1) Restricted e.g. St James Place
        2)Restricted with a monitored and reviewed panel of product providers
        3) IFAs who operate as in 2

        Next year the rule around being an IFA loosens a bit e.g. Research on recommendations must be ‘sufficiently diverse’. Which is the same as 2 above. So we all do the same!

      • PS There are all sorts of clients out there and room for many different ways to pay for fees etc.

    • Thousands of clients eh?? If you can’t be honest on here then it unlikely you are honest with your “clients”. Ever asked them if they know what a fair price is and have you even told them what they are paying?? Doubt it…..

      Well said Nick, it just a shame all advisers are lumped together and the term financial planner has been hijacked by long in the tooth transactional salesman in order to continue to line their own pockets at their client’s expense.

      • Yes thousands of clients with over 40 years experience and a team.

        I am still waiting for anyone to challenge my point about IFAs have a ‘restricted panel of companies they recommend’ of favourite companies they trust. I defy anyone to contradict this? I have thrown down the gauntlet.

    • The only ‘rubbish’ thing here is your claim to have ‘thousands of clients’

  3. I operate on a contingent charging basis or a fee only basis. I have never had anybody ask me if they could write a cheque even though I would be quite happy to accept this.
    Towry were fee only and nobody would want to talk to you in case it cost them money. Look where Towry are now!
    You cannot make these general judgements based on one person’s experience.
    You do not have to sell a product to be paid a fee for advice but if a new product (pension plan) is the best advice then contingent charging is more cost effective.

    • I don’t think you mean “contingent charging” in your last paragraph I think you mean “adviser charging”

      My example in the story is based on one email. In practice we are experiencing something similar multiple times per day in the independent advice sector

  4. What I have found is that people are different.

    There are many valid charging methodologies, with different characteristics, and people tend to prefer one which suits them.

    Solicitors historically did not offer contingent fees, and introduced them as there was massive client demand (no win/no fee), and not just from the ‘can’t pay’ crowd – although true enough that’s a large part of the reason.

    I have no problem with contingent charging, or non contingent. I’m not personally a fan of hourly rates, simply for reasons of practicality. I think an initial meeting without commitment or cost to either side beyond their time is important for my business model, but I wouldn’t seek to impose it on anyone else.

    Treat customers fairly, manage expectations, never lie, give good advice; If you follow those ‘high level principles’ (as well as any others which might apply!) then how you charge is less of an issue – but it will matter to some people, and that’s fine – we’re not for everyone, and everyone is not for us, but for those we suit, we do a damn good job.

  5. It is easy to say rubbish and make personal comments. All I am pointing out is that if you want to be, and be universally be perceived to be, impartial then contingent charging can be a problem. It may not be in your head, or in your clients. Nevertheless the allegation of bias to do something so you get paid can be made. I have no doubt that many advisers use contingent fees and it works well for all. You may find yourself lumped in with a group of people who use contingent charging, that you would not wish to be. associated with. PS. definitely not a goody two shoes. I just like to be paid for all the work I do.

    • I think that’s right it’s what the client thinks that matters. The client in my story couldn’t understand how he was getting impartial advice if he was only paying for it if he bought a product

      An IFA I spoke to recently said “we don’t call it contingent charging we call it commission!”

  6. We still have product salespeople and financial planners, if a client wants advice that is in their interests they go to the latter.

    By shopping around you find out who does what and make your choice.

  7. Nick, it’s arguable whether ‘proper advice’ as you refer to it depends on how it is charged for. But even if you were to charge a fee, there is still an element of contingent charging because recommending a transfer will almost certainly mean more fees for advice on the resultant monies going forward. In principle you might have removed one conflict but you’ll never remove them all.

    As I said on another recent post, it’s really about how trustworthy the adviser is NOT how they charge. An adviser with integrity and good ethics will do a ‘proper’ job regardless of how they are remunerated. An adviser lacking these qualities is going to be on the make from clients whether they charge fees or work on a contingent basis.

    • Grey Area

      No that’s wrong a fixed fee for advice/financial planning and implementation so that’s no additional fee. And as you know good practice means the client can always refuse the ongoing review service and associated charges

      I agree with your comments about the charging methodology it is clearly about integrity and indeed transparency

      But my question remains “Why did the Client think he wasn’t getting impartial advice when he was only going to be charged if he bought a product?”

  8. Good article Nick and I have to say that personally I would be in the same shoes as the person in your example. I have absolutely no problem with paying the “going rate” but I would feel very nervous if I only had to pay if I bought a product. It’s like going to the doctors and them only getting paid if you agree to have an operation. I’ll have have an operation if I need one but I’m really hoping is that the doctor will tell me I don’t need one! And, of course I’m paying through my taxes for that doctors advice irrespective of what advice he gives me.

  9. I think it would be more accurate, Nick, to say that contingent charging may deter SOME clients, typically those who have a clear understanding of what they want and what they don’t want. But such people are a (quite possibly very small) minority.

    Some prospective clients (in fact, probably an only slowly decreasing majority) are deterred by the prospect of having to pay a fee regardless of whether they buy (into) something.

    I admire the discipline of Informed Choice’s charging model and try to emulate it myself, but it’s not easy and I don’t think it’s appropriate to generalise.

  10. Nick Financial advice is an Art not a science. Please don’t be dictorial on what is and is not ‘proper’. Everyone is unique and will respond uniquely.there is a place for both approaches

    • David

      I can’t dictate anything to anyone I can of course, just like anyone else voice an opinion and hope for grown up debate.

      Goodness let’s hope MM never gets like NMA

  11. There are evangelists who wish to ensure all follow their path to enlightenment, meanwhile the rest will go to hell.

    Atheists can just get on with it and live and let live.

  12. Contingent charging relys on the sale of a product meaning that if it is in the clients best interest to pay off his or her mortage, diversify cash holdings, spend more money or gift, the adviser would not be able to levy a fee using a contingent charging structure but yet any of these recommendations might add significant value to the client.

    I think this is the challenge we face with non-contingent charging, making sure the outcome for the client is best for all concerned.

  13. I’m thinking of having a question early in the factfind: How do you want to pay for the financial advice you will receive? And list 1 Contingent charging; 2 Fixed fee; 3 Hourly rate. They will all say, What is contingent charging? The next question is, Which is the cheapest? Problem with Fixed Fee is they could finish up paying for nothing, and Hourly Rate, they could finish up paying for slow work and hold ups.

  14. Agree with much of what you are saying Nick. However, MiFID II is based entirely on a product sale, a contingent charge. It reinforces product selling, percentage fees and certainly not advice. Any initial fee not taken from the product (e.g. a non-contingent fee) has to be added back into any otherwise clean “products(s)” to show in an arbitrary cack-handed way the total cost of the advice, the effect / reduction on investment return even though as you say the advice relates to pensions, investments, unregulated tax advice, budget forecasting etc. and not just the investment element (if there is one).
    MiFID II disagrees with your viewpoint (and mine for that matter) and goes against the principle of advice – and the will FCA enforce it even though they recognise that MiFID II is more appropriate to the rest of Europe than the UK. So much for Brexit and our professional bodies that roll over and ignore the threat to independent, non-contingent advice.

  15. Sadly Nick out of Europe does not mean a change in legislation. The Government are committed to MiFID II and article 3 only allows analogous alternatives. What we have are laws which are stupid, irrelevant but because they are law have to be complied with!
    What we need is a commitment by the FCA not only to advice but to regulation commensurate with advice processes and a willingness to promote standards so that consumers can identify easily firms that committed to our approach. There is another article in MM which shows the value of advice – it allows people to sleep at night, to keep their health and achieve their ambitions. And you know what, product does not come into it!

  16. Interesting comments

    We have done several reviews with a recommendation for new clients and charged on a ‘job basis’ (taking into account the complexity of assets etc). Its not rocket science – the fee may well be negotiated with the client – but essentially both parties have to be happy and the fee should at least cover all the practice costs. If the advice does lead to a product – then the client can then either use us to execute – or use someone else. Our fees will be discussed again in the product execution.

  17. At the end of the day the client is right …even tyre kickers

    How or what you charge is largely immaterial, the client will determine that !!!

    As in this case previous advisers were not willing to alter their own practices so the client went to some-one who did… its called shopping around, simple as that

    Could be no more than, you Nick have got superior people skills, and the client bought into that ?

  18. I was undertaking some consultancy work with an advisory firm recently and they said that they were getting more clients as a result of charging on a non-contingent basis.

    • So, from your sample of ONE advisory firm Mr P, what conclusions should we draw? SJP charges exclusively on a contingent basis and its hardly short of clients, is it?

    • Rory

      I think it’s a direction of travel which at some point will become the norm.

      Nick

      • I think it’s a direction of travel which is becoming more common. I think it will only become the norm if regulation continues to shrink the advice market and lock out more of the mass affluent through increasing costs.

        Non contingent charging in general favours the better off, and hands a bit more power to the customer in terms of dictating the price they pay – so it half delivers the regulator’s aim of getting a better deal for customers, but fails in their objective to widen access to advice.

        This is all just my opinion of course.

        We have clients on client agreements reflecting each methodology – and they self select. 90% choose contingent charges currently.

        • Hi John

          Interesting feedback. Does that mean 90% of the work that you do depends upon the client buying a product?

          Interestingly today the client I described in the article signed and returned the engagement letter agreeing the non contingent fee. He has four DB benefits and knows that he will get a full financial Plan including specific advice about what to do with those benefits.

          With the regulatory starting point on this subject being not to transfer unless the suitability evidence is strong and with non contingent charging he is now confident he is getting impartial advice

  19. Just looked through this thread…. oh dear John.

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