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PFS urges advisers to address ‘opaque’ charges

Advisers must make charging models as transparent as possible to turn around the public’s perception of the industry, says the Personal Finance Society.

PFS chief executive Keith Richards says potential customers have been turned off financial advice by “opaque” charging structures.

He says: “There is a common thread, coming from the FCA on its disclosure rules, from Government through the guidance guarantee, and consumer groups all have a clear view that professional services deliberately try to make their charging structures opaque to lure clients in.

“We have got to make some efforts to change that perception. We are encouraging members to consider how they structure their charges from the consumer perspective. Advisers are starting to look at the first stage of the process as a defined service for a defined cost.

“We are starting to see a focused review, for retirement or investments, that starts with a fact find and ends with a report on a client’s options, for a defined cost.

“That is opposed to advisers funding the initial meeting at their own expense, which consumer groups still feel is trying to lure customers in.”

Speaking at the PFS annual conference today, president David Thomas revealed the PFS would be publishing good practice guidance on how advisers should explain their charges through websites.

He said: “Our consumer insight panel has been invaluable in better understanding consumer needs. One example of that is research presented to us by Which? recently on the lack of transparency on adviser charging on adviser websites.”

At the same event BBC Money Box presenter Paul Lewis said too many advisers do not display fee information on their websites.


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There are 10 comments at the moment, we would love to hear your opinion too.

  1. Websites should already be disclosing costs so that consumers can determine what their advice will cost them. The last FCA thematic review on adviser charging made this very clear. Now the PFS feel they should put their oar in!
    I have looked at many websites and been astonished at how well known firms and advisers are breaching the FCA guidelines and I would expect the PFS to encourage their members to follow FCA good practice rather than prepare their own!

  2. Derek Bradley ceo Panacea Adviser 7th November 2014 at 10:36 am

    Readers may be interested in some observations we made on charging in July 2013. It read:

    “The fan is about to be turned on and a very unpleasant mess could be getting carefully molded to hit it.

    The FCA boss, Martin Wheatley says “In some cases, firms are charging a percentage of product investment, and clearly it takes away product bias in the sense that we are no longer seeing firms recommending particular products because of the payment that comes to them, but it does not take away ‘dealing bias’, because if you only get paid if people buy a product, then you are going to want them to buy a product rather than pay off debts or do something else.

    There are some concerns about whether that is entirely compliant with the philosophy we have set out, and it is something we will come back to.”

    There is considerable anti-Wheatley adviser anger expressed within the Internet forum ‘ether’ and for once, as a staunch defender of advisers, I think they may have not focused on the real metrics behind his words.

    Martin Wheatley actually has a point.

    Adviser charging by percentages of funds under management rather than time taken was always going to be sailing close to the wind in a fee only world.

    Adviser intentions from Panacea research carried out with GfK indicated that some 72% of advisers would levy their charges via the product and astonishingly a significant number would not use providers who did not allow this facility- product bias?

    Our latest GfK research has indicated that post RDR, most advisers are charging an initial fee of 3% of funds invested and 1% for ongoing per annum across a wide array of segmented servicing models. It may or may not be great for the consumer, but in many cases the percentage of fee quoted for a lump sum investment today is very similar to single premium pre RDR basic LAUTRO commission, around 3% I seem to recall.

    As Frank Carson said “it’s the way I tell ‘em”.

    So with a proposed investment plan for £250,000, the fee would be £7,500. But what would the picture be if calculated on an hourly rate?

    Of course time taken does not have any formula to accurately indicate an actual duration as every client is different, but, given that the average hourly rate charged by advisers was £167 per hour, the ‘math’ would imply that the advice on a time basis for a £250k invested amount equated to 44.9 hours.

    For an investment of £100,000, the fee would be £3,000, and a time basis reflection of 17.96 hours. Yet the time taken to fact-find, research, report and execute a transaction or series of them may be more than for an investment of £250k or vice versa.

    This is not about professionalism by way of qualifications providing the ability to see payment by a rebrand of commission. It is about reflecting professionalism charging in the same way as other ‘professions’ (if profession creation was one of the intended RDR outcomes) and that is by charging purely on units of time.

    The actual source of fee payment – either direct from the client or from the fund is not too relevant. But should it be based on time? And should it be linked to a transaction? After all, the logical conclusion is no transaction = no fee- as Wheatly implies! What then as the time taken is almost the same, a service has been rendered and payment due?

    Where I do take issue with Mr. Wheatley is that after many years of progress toward an RDR world (where the FSA, as was, agreed with the concept and amounts involved when charging a percentage of funds under management) he could be sending strong signals that this new regulator does not agree that this type of charging should continue and we should prepare to hear that stable door slam soon.

    I have very strong, cynical suspicions that the FCA is wanting to find yet another way to get rid of advisers from their world by making it impossible for them to remain in business as the imposed income reducing possibilities of RDR cannot ever match the increasing and varied calls of cash from the regulator, FSCS and the FOS.

    And where is the consumer in all this? Research findings to be released soon would suggest that there is a significant reality gap between what advisers think consumers will pay for advice and what consumers actually think.

    Not a good outcome if advice for all, but at a cost, was the intention”.

    Are we getting closer to the door slamming shut as 2014 draws to an end?

  3. “That is opposed to advisers funding the initial meeting at their own expense, which consumer groups still feel is trying to lure customers in.”

    I personally completely and utterly defend the “initial discussion at our expense” strategy for many reason. Chief among them is the fact that far fewer people will engage with a planner if the first chat is chargeable. The first chat is about getting a chance to understand what the individual (not a client at this stage) is looking for and for both parties to gauge weather they can work together.

    Only after this can the real work and charging for the work begin.

    Whilst the so called ‘customer focus groups’ may not like it – real people, you know the ones we deal with, they actually prefer it this way.

  4. @Sam – there is no FCA requirement for IFA web sites to disclose charges. The FCA merely requires us to disclose the charges to a client, in writing, before the advice process starts.

  5. Always amazes me how everyone outside of the adviser community knows so much better than we do about running our businesses and how to charge.

    About 6 weeks ago I was with two individuals around (hubby and wife) who were referred to me by of his brother because I did business for my client on a fixed fee basis (not my usual but thats how he wanted it) and the referral was more than happy to pay a fixed fee if he agreed to the amount for what he wanted done (or so I thought).

    Having done the initial meeting, we discussed the various ways in which the fee could be calculated etc etc along with the total amount I would charge for doing the work. We agreed that I was to look at his and his wife’s pensions and make recommendations regarding benefits of potentially switching the plans or re-jigging the existing ones in terms of funds available etc etc – you all know the score – so off I went, armed to the teeth with a fully completed fact find, ATR questionnaire, letters of authority etc. You name it I had it.

    His fund value is in excess of £375,000 and hers is just under £50,000. We finished the meeting at which point, as they own their own different businesses, so wanted to pay me individually from their business accounts which is not a problem from my point. I told them I would confirm this by email

    I sent my usual post initial email to confirm the outline of the meeting, the work to be done and the agenda going forward along with the fees – Equally split between them. Thereafter the problem started

    The wife called me up and accused me of “trying to rip her off by charging her the same as her husband when his plan was worth more than 6 times the amount of hers”. She categorically would not accept that I had the same amount of work to do for her as I did for him and said that they were taking the business relationship no further. They were going to find another adviser who “lived in the real world of business”

    I was having a drink on Monday with my client and during the conversation his bro and sis-in-law landed in the bar. Awkward or what? They didn’t know it was me until they came round to the client’s side of the table and her mouth dropped. I asked her join us and not to worry about any feeling of awkwardness she had as I had not done business with everyday person I had met and there was not an issue. I bought them a drink and after about 5 minutes of conversation the atmosphere cleared up a bit.

    During the following hour or so that they were there, I asked if they got themselves sorted and they confirmed they had. They had gone to an adviser who charged a fixed percentage fee rather than an amount. I have no idea how much it cost them and don’t really care.

    This long winded blurb was to highlight that every consumer is different – there is no one size fits all solution. I really wish the PFS would start backing what we do rather than giving us the benefit of their “vast business experience”

  6. Do all Estate Agents charge a fixed fee for selling a house?

    Do Fund Managers charge a flat fee?

    How about mortgage lenders?

    Does my rather expensive accountant justify how he’s arrived at his bill. The one he sends after the work, because he never give me a price beforehand and always seems to have non-specific “extra work” to have done each year. (If it wasn’t for the fact he passes other business to me I wouldn’t use him)

    I worked within a national accountancy practice for many years, who charged fees based on what they thought they could get away with. No rhyme or reason or time estimate or the same flat fee for all clients. they even had a specialist tax planning arm that charged a non-refundable percentage of the tax saved, even if the clients were challenged by the revenue and the tax ended up being paid anyway.

    I have some clients who, when given the fixed fee cost, will say to me, “Do I have to pay that? Can you not take it out of my fund?”

    Then when we talk about reviews they don’t want to pay a retainer or a fixed fee for that either. What they want is to be able to ring me up whenever and for me to administer, tweak etc along the way and not keep sending them separate bills every time I do something or meet up with them. Many of them prefer that I receive some sort of ongoing payment from the plan. They also see that as a way to keep me on my toes as my income is linked to their improving wealth and they can walk away with that at any time if they are not happy with my service. It’s a pity fund manager don’t work that way because they get paid even when they’re not very good.

    It is also not true to say that you do they same work regardless of investment size. I tend to find that if i’m researching more solutions it will take me more time, buying and selling more funds in a large portfolio takes more time than a small one with less. Then there is the risk premium. If a big client goes wrong the compo bill is going to be much larger. if the PI tries to wriggle out of it then who is left paying then bill? So if I take a greater risk to my business with a larger client should I not also re-charge some of that back to them as a “risk premium”? otherwise why isn’t everyone’s PI premiums based on a flat rate or the FCA’s fees?

    I offer all forms of payment method and fully disclose this upfront and give the client every chance to choose what they think is the best way for them. Surprisingly many prefer to pay percentage out of their funds. Funny that!

    Horses for courses.

  7. @Marty – a very well made point.

    IMHO the ‘fairest’ way to charge clients is a fixed fee or hourly rate. However, this comes with a number of issues. The first is that, as Marty states, some clients with lower lump sums will feel that they are paying a much larger proportion of their investment just to cover the cost of the fees. Obviously this structure is going to disproportionately impact people with less in savings or pensions.

    The second issue is that when charging by the hour how do we know how long it is going to take to sort out an individual clients issues. For example, poor correspondence from life companies can significantly push up the time spent dealing with a clients existing plans. Should a client have to pay for this? Do we really want to create a culture of starting the clock every time we begin to act on behalf of a client?

    Recently we had a client who had managed to get them self into a situation with an excessive credit card bill. They wanted advice about where to take money from to repay the bill and ongoing investment income but were worried about the fact we have an hourly charging structure in place. They only came in when we agreed not to charge based on our existing relationship. Does the PFS wish to create an environment where these clients wouldn’t get advice because they can’t afford it?

  8. There are some myths pedalled about client charges! And the one that you charge more for larger funds because of the potential risk is one. Yes you can (should) charge slightly more for the small amount of extra work required to protect yourself but I am not aware of advisers who put the “extra” in a pot to cover for such eventuality that that risk comes home to haunt them. They take the extra and spend it!
    As for the argument that a client prefers to pay a charge from the product – I bet most advisers do not have the guts to argue what the downsides of that are. It is too easy to agree to percentages.
    Hourly charging is the best way with a capped fixed fee offered or something like that. But a fixed fee should always be calculated on the basis of how many hours you expect to work so what is the difference?
    By the way Adam – you are very, very wrong. Rory Percival told me this in person even though I quoted the relevant section of the Handbook to him! An example if ever there was one of the Handbook being at odds with what the FCA expects of us.

  9. So this week Sam, I have one client who has £1 million in a dealing account on a platform and says to me, here’s a list of funds I would like you to buy on my behalf (there were about 20). He then said that he had listed the amount he wished to invest in each fund but wanted me to buy half now and the other half on the 1st of December. (it wasn’t all of the money by the way)

    I also had a client who rang me to top up her ISA to the full £15,000 for this year and could she meet up to give me the cheque for £3,000 or so and discuss which funds to invest it in.

    My argument is the Flat Fee arrangement cannot work in these circumstances. In outline i’m doing the same thing for both clients. In reality have a wild guess which one will take me longer?

    Ah, charge for your time then. So they are both existing clients with existing monies. So the ISA client including pre meeting prep & valuations, travelling, meeting time. post meeting work, research recommendation report and transacting the business. 4-5 hours in time £500 at least. Out of a £3,000 contribution that is a lot of money. Or I could take a pragmatic view that her and her husband have in excess of £120,000 with me at the moment and that I expect that to increase over the next few years, not charge her anything and stick it with the rest of her money on 0.50% ongoing fee which is already in place. Which would you say treats my client the most fairly?

    The wealthier client? Well we had a long discussion about fees earlier this year and came to an amicably agreed figure. That involves a lower ongoing fee of 0.30%. however, we moved £330,000 from 0.50% pa onto the lower figure when he came along with a cheque for an additional £500,000. He also has some other investments that are still on 0.50% but in return I don’t charge him his annual fixed flat fee for running his SSAS. Our relationship is such that we are quite happy to discuss fees and that if ever I feel i’m not being paid enough then I will raise the issue with him and likewise if he ever feels that he is paying too much then he can also raise it with me.

    The point is, no two clients are the same and therefore how I deal with each is different. The FCA might not like it but they are all treated very fairly indeed and the key is that they feel they are getting value for money.

    I certainly don’t take out more money each year but as a sensible business owner who wants to still be around in 15 years time retain reserves and re-invest into my company. I also believe that my clients want me to still be looking after them in 15 years and for that I need to be profitable. Last time I looked at the footer on my letter headed paper it read “Company registered in England” the words “Not for profit” or “Charity” don’t seem to be there.

  10. Phil Sipocz – absolutely spot on – a pragmatic approach that works for both parties and supports ongoing true independent advice. My philosophy is if I add value then I deserve to be paid at a rate that is profitable to me and clearly known to the client – it is up to the client to select how they choose to make that payment.

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