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Peter Jordan: The case for moving to a retainer fee model

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While most of the industry has known that a mass conversion of percentage trail commission to percentage ongoing advice charges was occurring, it seems the FCA has only just noticed.

Although the FCA is probably right to suspect the motivation for favouring percentages is that the average customer cannot deduce the actual cost of advice from a percentage charge, there is another aspect to this. It is also possible that advice businesses have placed too much faith in percentages, when different advice charge models may more appropriate.

If the bias towards percentage charges is a sign that the market is fearful of sterling advice charges, is this fear justified? A simple example can weigh up how real any concerns might be.

A small business start-up is unsure whether to charge 0.5 per cent a year or £50 a month (CPI linked) for ongoing advice. The aim is to build up the regular advice charges to cover annual costs of £125,000.

If the business charged 0.5 per cent, it would need £25m of assets. Conversely, if it charged £50 a month, it would need 208 clients. If the same number of clients were equally easy to find regardless of advice charge structure, clients would need to invest £120,000 each if the 0.5 per cent model was pursued. Of the two models, which is most likely to be successful?

The wealth and income statis-tics would say £50 per month wins every time as there are not enough HNW clients. ONS stats say there are 3.8 million people with more than £100k to invest. Assuming 208 clients with at least this level of wealth are required to sustain an industry of 30,000 advisers, the market is 2.4 million clients short.

When viewed from this angle, it is difficult to rationalise why the market is resolutely backing percentage charges. Although fear may be part of it, I suspect it has more to do with a market that was very set in its ways and internalising advice charge deductions in products was made too easy by providers keen to preserve a financial umbilical cord with advice businesses.

But in the rush to convert from commission structures, have firms locked themselves in to unsustainable advice charge levels? Not only are income levels too low, but servicing costs are rocketing due to the “serve every customer” require-ment. This means huge numbers of low-end to mid-range clients will be unprofitable to service.

Although I am sure some businesses are better positioned, the stats on invested assets per capita will confirm that the market will need to revisit service propositions and that there needs to be a sustained effort to restructure and increase advice charges.

Another strong reason for ditching percentage advice charges is that I pay my adviser double what my wife pays for the same amount of advice and service. The market needs to find a new mindset and change some long-standing habits so that charges actually reflect the cost of advice and service provided.

Peter Jordan is head of marketing at Intelliflo 

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. Vat on £600 = £120 cost to client £720.00 per an

    £120000 x 0.5% =£600

    0.5% fund charge works for some clients but not all, my main point is that you take away the clients choice.
    for clients with less that £120,000 to invest fund charge is cheaper.

  2. Aren’t there an awful lot of people telling an even greater amount of other people how they should set their business up.

    It would be preferable if they would just get on with their own affairs and leave those that are comfortable charging a percentage to manage their own business.

  3. Why not combine the two, I find retainers work really well for corporate clients, (they reclaim VAT) and some retail clients who want more regular contact as they prefer this to an invoice for every meeting, (which would if no product solution also include VAT) I have some that have both, % charge fro ongoing investment advice and retainer for other ongoing areas of financial planning – our business is all about diversification – so give the clients the options.

  4. VAT liability is the same regardless of whether client pays via retainer fee or % basis. VAT is a red herring.

  5. Getting sooooo piss*d off with loads of commentators telling me how I should run my business. I am a sole trader and I dont intend to change that. I cant spend hours every month checking that all of my my 208 clients have paid the retainer and then start into credit control to start chasing down unpaid fees, then solicitors get involved etc etc. Its easy for me to work on percentages, and not to put too fine a point on it even my clients (all except 4) are not HNW know what a percentage looks like when I put down the £ & Pence figure, they are all content. As I said earlier – Just butt out and leave us alone to get on with running our own business the way its works for us and our clients, especially how it suits our clients

  6. A small business-start up has annual costs of £125,000? Really?

  7. A strange article…the author seems to be telling me how to charge my own clients, indeed he seems to be telling my clients how they should pay us. Maybe that’s something that’s for our clients and us to decide?

    Secondly, why isn’t Mr Jordan telling the fund management companies,bank advisors, life offices and platforms that they too should stop charging a % of the assets? And can he contact the Law Society to demand they stop charging a % on Probate work?

    Finally, let’s not forget, the FCA might be slightly surprised at the route that firms are charging (though I’m surprised that they’re surprised) but frankly there’s nothing much they can do about it…it’s a perfectly legal method of charging under EU law and there’s little or nothing that can be done about it.

    If the clients are clear about the costs and content with them, then there’s little more to be said.

  8. My back office system charges me % of income.
    They most likely have a lot of clients with a higher income than me as well as those with a lower income.
    The FCA also charge this way.

  9. @Anonymous 3.42

    Although slightly off topic, how can your back office system provider even know what your income is and why charge a percentage? Contact me for a better solution!

    It goes to show though that sometimes percentages work, sometimes fixed fees, sometimes retainers etc. As others have said, providing the client knows exactly what you are doing for them and the cost what has it to do with anyone else?

  10. Advisers may charge by reference to an hourly rate, a percentage or a charge per job. Any charge must be clearly stated and ultimately expressed in pound note terms whether it originated in a percentage calculation or not, and it must be possible that any ongoing advice fee be may be cancelled by the client.

    Ultimately what and how advisers charge their client is between the client and the adviser to agree.

    See COBS reference below

    COBS 6.1A.19 and COBS 6.1A.24R (2)(b):

    http://fshandbook.info/FS/html/FCA/COBS/6/1A

  11. Almost typical comments, with broad-brush assumptions (even accepting you have to assume something!) about costs and how easy to find clients etc….from a salaried marketing executive high in the Ivory Tower who has probably never done the job and run a business – certainly isn’t now, anyway!

    There’s pro’s & con’s in all the arguments, of course – but it’s down to personal choices between advisers and clients – regulators particularly (especially when they charge their ‘customers’ by %!) should butt out on this subject as long as they agree what they want – as matters now are in the post RDR world. It’s really nothing to with regulators, it seemingly just creates a path for some underemployed and otherwise unnecessary regulatory resources to ‘work at’ in pursuit of justifying their existence somewhere.

    The marketplace and related forces will change and evolve on charging practice/profiles – both initial & ongoing over time anyway….

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