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Nick Bamford: Why aren’t advisers explaining their charges properly?

Nick Bamford MM 700

According to the FCA, 73 per cent of adviser firms failed to provide the generic information on how they charge for advice and/or failed clearly to confirm the specific cost of advice to their individual clients in a timely fashion.

This thematic review from the regulator is a worrying document indeed. Post-RDR the expectation was that adviser charging would make it much clearer that consumers were paying for advice and at the same time help to promote competition.

The advisory sector seems to have a habit of collectively shooting itself in the foot to the extent that a recent article in the Daily Mail was headlined “7 in 10 financial advisers still mislead clients”. Well, that’s just brilliant. That is bound to help restore some of the trust so many commentators tell us has gone out of financial services (sarcasm is one of my greater strengths).

Forget for a moment what the FCA wants in terms of adviser charging disclosure. Instead, let’s try to look at it from a consumer perspective.

It is a highly technically complex financial world out there and for all kinds of reasons consumers want impartial, independent financial advice from qualified, skilled and experienced financial advisers (of all types). It must be blatantly obvious to all that those clients will also want to know how much they are going to pay for those advisory services.

There is a multitude of adviser charging systems vailable to the consumer but it simply doesn’t matter which one is employed. What matters is the client can easily and transparently work out what it is going to cost them. It is perfectly possible for an advice firm to describe

a) their method of charging (hourly rate, project fee, percentage of what is to be invested, or a combination);

b) an indicative price based on the advisers experience of how long/how difficult a task is and;

c) a specific price for that particular client. In fact, if this is hard to do either the adviser needs to improve their communications skills or accept they have over-engineered what it is that they do. 

The obvious response here is to try to blame the regulator but that is just disingenuous. Clients want to know how much is it going to cost and whether they are going to get value for money. If an adviser cannot answer those questions then they should seriously consider a new career path. Or alternatively let’s pass the buck to those wealth managers and private banks who were specifically mentioned in the context of disclosing charges in a durable medium, conveniently  forgetting that this was a review across all types of advisers.

If an adviser cannot answer a client question about price, directly and transparently, then let’s hope their prospective clients vote with their feet.

Nick Bamford is executive director at Informed Choice

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Comments

There are 21 comments at the moment, we would love to hear your opinion too.

  1. “Why aren’t advisers explaining their charges properly” ?

    Probably because they are trying to hide something !!

    Isn’t that what the regulator is going on about really !

  2. Nick
    I expect that the situation is not a poor as it seems. Failing the FCA’s scrutiny of generic fee charging documentation may have been caused by setting a range of possible fees too wide without adequate explanation. IFA’s falling into this category will have been alerted to the problem by the FCA and will have an opprtunity to revise their literature accordingly.

    Failure to do so will be an issue for such firms down the line.

    A bigger problem is failure to properly disclose actual/specific fees charged before chargeable work is carried out, in which respect your comments are fully justified.

  3. I find this rather patronising and clearly demonstrates the thinking of someone who has never charged and understands hourly rates. Someone who charges a percentage fee regardless of whether it is he or a junior adviser who does the work. Because he charges on a percentage basis, a firm that charges more for doing the same work as a client who has considerably less to invest. And probably does not discount adviser charges by pre RDR trail commission received.
    From evidence we have accumulated there is no clear correlation between product, the amount invested and the true cost to the firm and therefore the fair cost to the client. What the FCA want is misleading the client, inaccurate and puts us at a commercial disadvantage. We lose out on the chance to demonstrate our professionalism.
    What Nick says about being open with the client – and I entirely agree – can best be determined following a discussion with the client and the issuing of what we would term a scope of work breaking down costs etc. And when we issue the invoice we have timesheets to prove what we are worth!

  4. @sam caunt:

    The issue of percentages versus hourly fees is usually conducted without due consideration to some key factors 1. The issue of open-ended and almost limitless liability. 2. The idea that it is simple to work out what the number of hours to be spent will be.
    1. Until there is a stop-loss policy in place, there is no way that an hourly fee can sufficiently account for the potential costs of giving advice.
    2. I have consistently found that the few clients who are insistent on me working on an hourly fee basis, nearly always end up costing me the greatest number of hours – and often, for something which initially appeared to be a simple procedure.

  5. goodness gracious 11th April 2014 at 9:42 am

    Time charging is magnificent if you can guarantee your estimate is reasonably accurate and the client is sufficiently wealthy to afford it. The higher the value of the invested assets, the greater risk you take and the cost of indemnity insurance rises.
    All this boils down to is a percentage fee is probably better for lower value transactions where the hourly rate for doing the work would negate a lot of the benefits to the client. This means the risk of taking more time to do a job is bourn by myself. But always give clients a verbal estimate of the cost of the work, whatever charging structure you feel is best for a client, then give them the choice on which method of payment suits them.

  6. The FCA seems fixated on costs wherever they may be charged and seem to forget if you pay peanuts you get ……….. (google the full phrase and it comes up as a racist comment!). The whole way the FCA wants us to show fees is confusing with all the different options available.
    It may have been a more interesting survey if the public had been asked do you understand the way your IFA/ Accountant/Solicitor/Bank/ in fact anyone who sends you a bill has calculated their fee.

    Ask the public if they understand their utility bill for instance, I suspect the answer in many cases is “I know what the total cost is, no idea how it is calculated” Why? because it is what they have to pay that counts, not how it is calculated.

    I rarely charge private clients an hourly rate, but often quote a price for the job, easy and straightforward, sometimes it is simple and takes less time than expected, sometimes it takes longer, but the bill remains the same as I have done the job requested.

  7. At the risk of sounding somewhat thick as champ here, why does the FCA not pulish on its website (minus the frims details) the documents? This would let us see what type of things they are looking at to say – “this is not acceptable”. They also mention in their review that advisers overall are doing quite well on disclosure. Why do they not publish these too (less advisers details of course)?. Would this not be very helpful to all of us and help greatly increase this number from the 30% mark? For once it would show that the regulator is working with the industry to help us improve instead of just slating the “bad guys” and creating headlines that are not helping the “trust” issues as they see them.

  8. Advice isn’t about ‘product’.

    The FCA wants advisers to dispense with the product commission benchmark that currently drives the vast majority of adviser charging models. The ad valorem ongoing fee is trail, cut-and-pasted into adviser charging, with regular reviews imposed to justify it – an easy earner that may not reflect the actual work undertaken. There is evidence that some advisers obfuscate charging menus, thus making it less clear that a client can elect not to have the ongoing fee collected if they do not feel the need for review. Hourly rates are more a accurate reflection of time and effort spent on a piece of work. Advisers’ respective skills will be reflected in their respective rates. They are however difficult to account for, reconcile and audit. I suspect that’s why a relative minority take that approach. Ad Valorem “trail” is easier, habitual, but tends to make the investment content rather more of a priority than any associated financial planning. Hence (I surmise) the boom in “Wealth Management”.

    The FCA review appears to support my contention that there remains a cohort of advisers – and providers – who find it embarrassing and difficult to justify their charges. The history of commission disclosure stretches back to the soft-commission rules introduced over 25 years ago, since when every attempt to make charging more transparent has been fought tooth and nail, with spurious justifications.

    It’s time to ‘man-up’, ladies…

  9. @ Sam Caunt A cursory glance at our website will show you that our advice and implementation fees are monetary amounts not percentages. Project fees based on VERP that we stick to rather than hourly rates where work might expand to fill the available time.

    Our review fees are though (currently) expressed as a percentage of assets under management thus aligning our remuneration with wealth management success we deliver to our clients.

    I think those who are experienced hourly rate chargers know it is not difficult to provide a meaningful indicative cost in advance of knowing the full details of the clients needs/wants.

    I am sorry you thought my piece was “patronising” (but history tells me you don’t like anything I say where it conflicts with your position) that just isn’t my style.

    Phil Billingham in the last few days wrote a very simple step by step approach to indicative and definitive pricing, well worth taking a look at that

    @marty spot on. Why were there no examples of “good” and “poor” practice” in TR14/6?

  10. Phil Billingham 11th April 2014 at 2:12 pm

    It is a little amusing that this issue has brought out so many comments from Product Provider and Accountant ‘Consultants’.

    Is this like taking marital advice from an Eunuch? I’m sure they have read a book about this stuff……

    Back on Planet Earth, those of us who have both read the FCA material and deal with life clients have a different view. Which may not be correct for everyone else, but is at least based on reality. And I don’t presume to say that if you disagree with me you are a crook. Which I get irritated by when others do it to me.

    Guess what? Most clients do understand percentages, and yes, we do always disclose in cash terms. Most clients – not all – prefer ad valorum fees, rather than hourly or retainer. This is especially true when dealing with Trusts and Pension schemes (Tax treatment and not having a bank account are factors here)

    Funny how these ‘Eunuchs’ don’t mention these factors.

    The world is not as simple here on the ground as it is from the top of that tower……

  11. @ Graham B 1259, you patronising person. Why do you berate everyone who charges a percentage? If the FCA wanted to get rid of it they would have done it before now. They just want us to be clear.
    You may not like the old model by a different name and that is fine if you have a different way of doing it, great I am happy for you. If it works for the vast majority then there is merit for those of us in doing it.
    You go on about us finding it hard to justify our charges etc etc. Let me put you straight on a technical point here. I (or you for that matter) don’t have to justify to anyone what I charge, not even the client. I do have to justify what I charge for though and I do that with every client. They have a simple choice – take it or go elsewhere. For me advice most certainly is about product. I have yet to meet a prospective client who has told me they prefer to pay for my advice if there is no product at the end of it. Where I live and work people prefer to for there to be something tangible as an outcome.
    I tell them that that the end-plan or policy is simply the by-product of the advice I give. If there is no end product they don’t have to pay me. Guess what, like most advisers who charge a percentage fee I have no problem in doing business with clients and have a really high closing rate. Here are a few numbers for you to think about: 237, 214, 201 and 99.8. These are my activity levels for 2013. 237 fact find meetings 214 recommendation letters done, 201 is the number transactions implemented and 99.8 is my 12 month rolling persistency level based on gross fees and commissions verses net ones.
    My own philosophy is that if I can’t sort something out to meet a client’s needs, by way of a product then I don’t deserve to get paid. Guess what, I am very comfortable with this philosophy and these figures.
    You and people like you may call it policy flogging, I have no problem with that. Indeed I am proud to say I’m a salesman through and through, the people I deal with are obviously happy and I earn a good living at it. I’ve been doing this since 1989 and have yet to have a complaint against me. Please do not slate those of us who operate on this basis just because you think it’s the wrong way to do it. It can’t be wrong if the huge majority of advisers still operate a model that works the same way as the old commission model. Our clients and we are very happy. You do it your way and we will do it our way. Everyone’s happy as long as others like you don’t keep saying its wrong – “You should do it my way”. It is all about what the client prefers and that is all that matters really isn’t it? Have a nice day

  12. @marty I’m having a fine day, thank you. To be clear, I’m one of those ‘Consultants’ @phil billingham refers to (not sure why inverted commas were necessary), and I have IFAs as clients as well as fund managers and other industry suppliers too. And no I didn’t read it in a book – just 37 years experience in sales (yes, to clients) marketing (to clients and advisers) and investment management. That experience tells me that advisers’ sensitivity to this issue (note the venom in the comments) reflects an insecurity; if you’re happy with your own advice model, don’t assume a challenge to the industry (ie those whose charging models the FCA saw fit to admonish) from people like me is a challenge to you directly – I don’t know you.

    As for percentages, again I have no problem with that, as long as the Cash amount it equates to is not tucked away out of sight. When one fund provider issued their post-RDR pensions illustrations, there were howls of protest from advisers because the document showed the client what their investment might be worth without the impact of adviser charging.

    My ‘problem’ with ad valorem charging, ie by percentage of AUM, is that it is, in effect a retainer (Phil). The FCA suggests that a number of advisers have not been clear that regular reviews are not mandatory, and hence neither is the fee that is attached. If a large swathe of customers decided not to pay a review fee, this would have a huge impact on advisers’ revenue streams. Hence there is a clear potential for bias in service models.

    After 25 years of seeing commission (and now charging) disclosure, thankfully we are at the point where the last vestiges of ‘old school’ (I’m getting to like inverted commas now) ‘clients won’t understand that I’m really worth it’ attitudes are disappearing. But the FCA review demonstrates there’s still work to do.

    Have a nice day yourself. And you too Phil…

  13. Phil Billingham 11th April 2014 at 4:05 pm

    Ok – its POETS day, so in the interests of debate, without getting too personal, some thoughts.

    We all hate generalisations. Men don’t listen. Women can’t park. Advisers are hiding charges.

    So perhaps the reaction by Advisers to what we see as ill informed comment is that actually we DO disclose all charges. All the time. And when clients have an ongoing relationship with us, its is because that is what they want. They are not stupid. They know what they pay and why.

    Frankly, we deliberately filter out those clients who DONT want that relationship. Not everyone gets to be a client. That’s what the first meeting and our marketing is for. We don’t want to sell to everyone. And we are comfortable with our value.

    And, of course, the ‘we’ is our firm. I don’t pretend to speak for all advisers. some of whom will do things differently

    So when Consultants who speak from a product provider viewpoint, who see that we are Distributors of theirs, choose to lecture us – and that is what it feels like – then you will see varying degrees of irritation.

    And that is redoubled when we see comment and advice from a product sector that has historically, and continues to mislead on charges, missell products, mis-manufacture products, deliver appalling service, lie to clients and need I go on? Include the large audit firms and there is a staggering degree of self interest and double standards at play here.

    But, of course, that is a gross generalisation….. Welcome to our world

    So, lets all have a nice day

  14. Having participated in this the latest review I feel able to make a small contribution here.

    The feedback given was in three parts. Firstly, it was noted that there was some good practice and this was specifically identified. A welcome development and a thank you to the FCA for including this.

    Secondly, there were areas where the FCA felt the rules weren’t properly implemented (all minor issues). Reaction to these ranged from ‘OK, fair point’, through to puzzlement at the pedantic way the rules were being interpreted and wondering if it was connected to the real world.

    Lastly, there were some items that were compliant but had room for improvement.

    As a result of the second I suspect that we were included in the ‘negative’ statistics quoted in the article. And having a look at Nick’s website I can see one area where I’m pretty sure he would get a similar comment to one of the more weird ones we had and thus be included in those negative stats.

    So, it’s easy to be holier than thou and believe you’re doing it perfectly. Right up to the point the FCA disavow you of those thoughts, however bizarre their view. It does mean these statistics can produce a very skewed picture of reality though.

  15. @ grey area

    Thank you for that it would be helpful thought if you were able to be more specific about what part of the website you feel might not be what the FCA wanted? Although having been through an FCA thematic review it’s interesting that they didn’t comment but you felt they might have done

    Haven’t been able to check out your website though anonymity being a complete barrier to that. Liked your comment about “holier than thou” though something to do with your avatar?

  16. And see the Times article from Saturday “Commission is gone, yet the cost of advice remains secret”

    * “many advisers charge a percentage of the amount invested, a cunning way to disguise the true cost as it is widely recognised that many people don’t understand how percentages work”

    * “it is all very well being quoted an hourly rate, but it is not much use if you are not given an indication of the number of hours your work is going to take”

    And most damning of all;

    * Your adviser admits how much you will be charged initially but fails to mention that you have also signed up to pay for an annual review- a review that will provide a welcome ongoing stream of income to your adviser, straight out of you bank balance.

    Anyone not worried by this view of us?

  17. Yes – the FCA behaved irresponsibly just as they did with legacy products review. It was not 73% – I know there were other firms that complied but not with the FCA’s view.
    Let us go further with this. What the FCA has created is a limited advice comparison facility.
    We do not give limited advice – our compliance procedures say this. It give full advice. Otherwise we say thank you but no thanks as this represents too much risk to both parties (TCF). Therefore I would expect all examples by every firm to include limited advice disclaimers and examples where the fee charged would differ from what is shown. I do not see that and I dare say the OFT would be concerned.
    Percentages do not work. We do not charge on percentages. The examples we quote are not real examples nor are they typical. We cannot go to any file and say this is the fee for this amount invested. In the real world percentages figures for same amount varies between 0.5% and 7%…..
    So our disclosure should have the following caveat. You will not pay this fee (as we have never charged it) as it will depend upon whether you are an existing customer, whether the suitable product is regulated or not, your actual needs as identified, the work involved, its complexity, ATR, personal circumstances, tax situation, existing investments, whether you are family (why should we not be able to charge less for commercial reasons?, who does the work etc.
    In fact it is a waste of space. How effing stupid is that?
    Speak with us, let us quote and then shop around…

  18. “Yes (I am concerned” – the FCA behaved irresponsibly just as they did with the announcement of legacy products review. It was not 73% – I know there were other firms in a small sample that complied but not with the FCA’s view which has changed.

    Let us go further with this. What the FCA has created is a limited advice comparison facility.

    We do not give limited advice – our compliance procedures say this. It give full advice. Otherwise we say thank you but no thanks as this represents too much risk to both parties (TCF). Therefore I would expect all examples by every firm to include limited advice disclaimers and examples where the fee charged would differ from what is shown. I do not see that and I dare say the OFT would be concerned.

    Percentages do not work. We do not charge on percentages. The examples we quote are not real examples nor are they typical. We cannot go to any file and say this is the fee for this amount invested. In the real world percentages figures for same amount varies between 0.5% and 7%…..

    So our disclosure should have the following caveat. You will not pay this fee (as we have never charged it) as it will depend upon whether you are an existing customer, whether the suitable product is regulated or not, your actual needs as identified, the work involved, its complexity, ATR, personal circumstances, tax situation, existing investments, whether you are family (why should we not be able to charge less for commercial reasons?, who does the work etc.

    In fact it is a waste of space. How effing stupid is that?
    Speak with us, let us quote and then shop around…”

    The FCA has got this badly wrong.

  19. I have just glanced through the comments and think many may “have gone off on one”. Listening to FCA and in particular Rory Percival as we can now all do, it is the timely confirmation of the cost of advice to the individual that I believe is causing consternation. We (hopefully) all give generic indications of the cost of the advice and to date then followed up with illustrations and suitability reports as these are specific to the individual. However; there may be a significant time lag between issuance of the generic letter of engagement/terms of business and the suitability report and this is what I believe Rory Percival seeks to put right. This may mean confirmation in writing following issuance of the generic documentation in advance of the suitability report. So in essence it will be a case of show them what we’re going to charge (generic document) gain agreement and then produce a client specific fee agreement/confirmation (for the work that will be done) and then confirm what we have recommended in the suitability report. Now I “may have gone off on one” myself so apologies if I have.

  20. @ Nick Bamford

    I only had a quick look at your website. On the home page under the ‘Introduction’ tab you have a link highlighted as ‘Independent Financial Advice’. However, that takes you to a page entitled ‘What we do’ which doesn’t mention independent advice or what it is. It doesn’t bother me but based on feedback we had I could envisage it being something the FCA would pick up on.

    I’m anonymous because my posts are a personal view and I have a senior position at a firm. It wouldn’t be fair on them to post under my real name as it would inevitably be associated with them and attract attention they don’t want.

    It hadn’t clicked that my holy comment was linked to my avatar as I’m not that smart! I like and agree with much of what you say both in this article and in others. However, statements about others being disingenuous and the general tone can come across, to me at least, as being at HTT. What’s more important is your words generate lively debate.

  21. @ Grey Area Seriously, the words in large print at the top of the page that say “Independent Financial Advice” doesn’t tell the reader that we provide Independent Financial Advice? I think even the FCA would spot that one!

    I agree with you though, lively debate is important it’s just a shame that people focus on what they perceive the tone to be rather than the real issues.

    How though do we deal with the kind of comments from the media such as the ones from The Times I detailed above and worse still the ones from Patrick Hoskins at The Times on Monday

    “Independent financial advisers could play a role but inevitably they will see their clients as Milch Cows and they are expensive”

    and again referring to IFAs

    “Nor, though making progress, are they sufficiently house-trained. Only last week the Financial Conduct Authority said that more than half of advisers are still not fully disclosing their fees to clients”

    and then to really rub it in the visual image was a cartoon of a man carrying his pension “honeypot” surrounded by wasps carrying briefcase labelled Financial Adviser!

    I don’t know about you but I don’t like this image of the IFA.

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