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Nick Bamford: Does it really matter how we charge for advice?

Nick Bamford

The adage that someone knows “the price of everything and the value of nothing” is so true when it comes to intermediary charging. Dennis Hall put the cat amongst the pigeons when he wrote asked: “What right do others have to tell us how to charge?”

Measured by the number of responses and the attack and defence arguments put forward by contributors, this really did strike a nerve.

I suspect the vast majority of advisers today have been through more than one iteration of their pricing policy over time. It would surprise me greatly if anyone had at some point not charged on a percentage basis.

I recall being “chewed out” once by industry colleagues for admitting that we as a firm had got our pricing policy wrong. Almost as if commentators felt there was something wrong about admitting a business mistake. I would argue the opposite is true.

I don’t know what the cost of running your business is. I don’t know what it is that you do that is different to what my firm does. How then can I judge whether you are more or less expensive than I am?

The challenge with the different pricing methods is less I feel down to flat rate versus percentage and more about the regulatory view of “dealing bias”. I don’t think that subject has really gone away.

I can’t evidence it but I suspect the regulator is still not on board with pricing that is contingent upon a product being sold. Personally I see no problem with that.

There is after all a massive need for consumers to save and invest and a proposition that delivers that seems to me to be one that might fill the “advice gap”. Perhaps it should be called a “product gap”?

Reading the arguments for and against percentage-based charging and indeed for and against flat-rate charging, I found myself agreeing with a lot of what was said. We operate a flat-rate charge for advice, planning and implementation and a percentage-based charge for ongoing services.

This has massively evolved over time and I see no problem with changing it in the future based on what we are doing for our clients and what we need to do to remain profitable as a business.

Dennis is right though, no one should be telling us how to charge. That said I think we operate in a very forward thinking profession when debate about charging is so open. What is often missed is the amount of sharing that goes on behind the scenes in respect of all aspects of business management, pricing being just one of those things.

What matters is less about how we charge and more about what it is we charge for. Price in isolation as flat-rate or a percentage is pretty irrelevant.

If my client is paying me money they deserve to know exactly what it is they are going to get for that payment. Perhaps that is why I like the engagement letter so much. An opportunity to describe what it is we are going to do for the client and the pricing points for the delivery of that service.

From a consumer, and indeed regulatory, point of view though it is all about transparency. Does the client know what they are getting and what they are paying?

If the answer to that is “yes” then does it really matter if it’s paid for by a flat rate or percentage charge? I think not.

Nick Bamford is executive director at Informed Choice

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. John Blackmore 8th March 2016 at 4:03 pm

    It matters very much how advisers charge for their advice. My belief is that far to many still charge for product “advice” taking their “fee” ( still really a commission) from a provider. Only when Advisers are paid directly by clients for the advice will the question about flat or percentage become relevant. still a long way to go.

    • Three points here:

      (i) Commission and product-facilitated Adviser Charges have very different effects on a client’s investment (so, no they are not the same thing);

      (ii) there’s the VAT angle (unless you’re going to swallow the extra 20% cost) on charging for the advice without recommending a product;

      (ii) clients can CHOOSE to pay direct or via a product-facilitated Adviser Charge for a variety of reasons.

  2. I agree with Nick on this. I respect both Dennis Hall and Paul Armson and value the insight the have both given. I have taken some things from what I have read and seen them do which works for me and what doesn’t I haven’t continued with, but as Nick says, the wheel may turn again and I must/should adjust to changes.

  3. John has a valid point. The charge should be for the advice – whether or not a product is purchased. Charging only if the client buys is so last century and a silly business model as you end up doing work for nothing and the old mantra that those who buy subsidise those who don’t just doesn’t wash. Why should one set of clients donate charity for the others?

    What is also vital (from what I have seen, since raising my head above the parapet) is the amount that is charged. There’s no other way of describing it some advisers and firms are ripping clients off. It is sad that these clients are daft enough to stand for it. If you have to charge (say) 1% for funds under management I would contend that your own costs are too high. Reduce them and your charge.

    Apart from that it matters not a tinkers cuss HOW you charge – although Amazon vouchers and some barter are very tax efficient! (You sort your plumbers pension and he sorts your heating. You give your accountant investment advice and he does your returns – and so forth).

  4. A good model – for me – is one that aligns the clients’ interest directly with the advisers’.
    If I charge an ongoing percentage of value and I don’t charge for dealing/switching of either investments or products, my sole driver is to increase my clients’ bottom-line portfolio values -pension, ISA, etc…. it makes no difference to me how or where the money is held.
    That very simple concept removes any incentive to deal or make product recommendations for any reason other than to improve the clients’ bottom line. If values go up, I earn more and my client is happy; if values go down, I earn less and my client is asking questions.
    My sole motivation is to keep my clients happy as that is where I will earn my money.

  5. Richard Wright 8th March 2016 at 6:13 pm

    Flat rate charging is extreamely unfair to smaller investors , percentage based charging creates a level playing field, surely thats what the regulator would prefer and frankly if someone cant work out in a few seconds what their percentage fee is in cash terms then … Well you know what im saying !

  6. This is a very good article, and a timely one on the back of Dennis Hall’s piece the other day !
    But both ask the wrong question, or should I say they ask the right question but in the wrong way,

    It has very little to do with “how” we charge its “WHY”

    Quite a few years ago I sat having a beer and a conversation about the RDR with a fund manager from, Invesco Perpetual, the topic got on to “why” it was wrong to standardize the IFA industry, I pointed out we are not sheep, so what should an organisation like the FSA (then) ask (demand) we all stand in line, to which he replied (after pausing for a minute), I have a theory, if you put 10 IFA’s in a room and ask to invest 20k you would get 10 different providers, 10 different funds, 10 different fund managers 10 different ways of taking their fees………and so on you know where i am going.

    “How” we charge has no real relevance (flat fee, retainer, percentage, commission, a mixture of all of them) “How” much we charge has no relevance and certainly not anyone else’s business, if its to much you will simply not get any clients (in time) and besides if you ask “how” you may never get a right or wrong answer !

    The clients need to know “why” we charge, regulation, research, levies, software, salaries, etc etc etc

    Clients need to know “why” advice is so expensive !!

    Those questions are easy to explain and you will all come up with a definitive answer……… and there maybe a good chance put 10 of us a room and 90% will give the same reasons ! (there is bound to be one)

    The very best thing about what we do is individuality, none of us do the same as another (there may similarities but not the same) we all have different styles, the simple reason is all our clients are different so they need treating differently. So people please stop telling others how to run their businesses and lives its got sod all to do with you !

    Does it mater “how” I charge for my services, asking my clients may be better, they will tell me in most cases, and in which case, it is, and could be a combination of all of the above ! ALL MY OR ANY, CLIENT WANTS TO KNOW WHATS THE COST !! when you tell them…….. then comes the “WHY” is that so expensive ……….its not the how its the why !

    Many other IFA’s or people may say I am to expensive or i’m ripping my clients off, quite frankly, its got sod all to do with anybody how much I charge and how I run my business so wind your neck in and get on with your own life,

    Maybe the FCA should take note, it has very little to do with how we regulate its why !

  7. There has indeed been much discussion about how IFAs should charge and many have taken umbrage at being told what to charge. Unfortunately, by doing so, I think some are ignoring the best interests of the client. Percentage based fees have inherent problems which I think the FCA would be concerned about. Firstly, contingent sales i.e. that you only get paid if the client “buys” something. Secondly the effect of percentage fees on client’s investments and whether the client would be better paying you by cheque. Ongoing charges can, if built in, make certain solutions unattractive to the client when in fact they are perhaps better and at least should be discussed with the client. Are you really acting independently? Ongoing fees if not proportionate to the service provided make alternative solutions totally unrealistic but if the right level or none is built in from the start and the client pays for ongoing services by cheque that unattractive solution becomes appealing. Thirdly, percentage based fees do not reflect the amount of work carried out on behalf of the client and in effect there is a cross subsidy going on. Not wrong but is it right? Fourthly, are percentage based fees something that the client is cute enough to switch off or ask to be adjusted to more honestly reflect the service they are being provided with? Finally, there is a real risk that many firms and advisers are more concerned about “practice buyout” which is valued on recurring income streams because that is how businesses are valued. Is it right that a strategy for retirement should dictate how a client must be charged?
    We need to challenge what we do and how we do it. We cannot rely on that boring cliché that other professions charge a percentage fee therefore we can.
    Finally, I will take another pop at the FCA. Stop telling clients how they should pay for advice. Clients do not understand the subtle differences between pure protection, investments, pensions etc. They pay us a sum of money for our services and in some cases multiple products and only that should be recorded for regulatory reporting.

  8. Julian Stevens 9th March 2016 at 9:28 am

    IC’s charging structure seems eminently sensible and is one that I myself try to emulate ~ not always successfully, I have to admit, simply because many of my clients cannot afford to write a cheque for the full costs of advice and implementation. But, in the great majority of cases, I do insist on clients paying upfront at least SOMETHING towards the cost of my advice BEFORE the presentation of any products or application forms. Against any provider-facilitated CAR, I offset the fee already paid by cheque.

    Advice that will be paid for only if a product is implemented isn’t really advice, is it, for the simple reason that it’s fundamentally predicated upon selling something. This why I have suggested that if the banks are to be allowed (for the first time) into the advice arena, as opposed merely to being allowed to return to selling products, the FCA should stipulate that they must charge fees for it, perhaps not less than a third of their proposed total initial charge.

  9. If I can have another pop???
    Surely a tiered percentage-based fee takes care of all of the concerns about suitability? Also, no one seems to mention just what is included in the percentage-based fee. Excluding borrowing, I include just about everything relating to my clients’ finances: income tax planning and annual tax returns, IHT planning and free probate for most estate work (not the very complex stuff or property transfers), free current and savings account advice, investment advice… The important part of this is to minimise any conflicts of interest.
    Another way of looking at it is to simply ‘look after’ our clients’ finances and give them the service we have promised and the reassurance they want. If we can do that, who the hell is in a position to tell us to do things differently?

  10. I think these are excellent points all being well made. Perhaps there really are no right or wrong ways, just different ways. Particularly like the @DH comment about the level of charging determining whether you will get clients or not. That surely is the acid test

  11. I personally think an initial meeting with a client to find out their requirements free of charge followed by an engagement letter with the costs to provide the advice not sell a product is the only way to go forward. I have been doing this for the past 4 years with a huge success. Clients want answers to their questions such as “Will I have enough to retire on ? ” “Am I paying enough into my pension/investment.” “What is the most tax efficient way for me to save” When you can provide answers to their questions and advise them the best way to move forward and charge for that then I truly believe clients value that more. It’s all well making a client say 6% per annum and maybe having in say funds that match his attitude to risk score of 6 but what if he only needed 4% to achieve his goals and you could of reduced his level of risk. When you find out what the client wants then you can advise what level or risk what type of investment along with the most tax efficient way for him/her to do this. I charge on an hourly basis as I know exactly how long it will take me to provide the advice the client is looking for. Client is happy as they know they have paid for answer to the financial needs, I’m happy as I have charged enough to cover my time and running costs. Not really rocket science.

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