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Why clients need to know about adviser charging

While autonomy and freedom of choice are critical to our wellbeing, there is a glitch: namely, our freedom to choose that which is not in the interest of our wellbeing. Hence the value in strong and clear advice.

Back in the Garden of Eden, God pointed out the risks involved in investing in apples, given the prevailing environment, recommending a nicely balanced portfolio of non-correlating food-stuffs. Adam, being one of those do-it-yourself types, got a tip-off on Granny Smiths and hit “buy” nonetheless. We know how that turned out. Free choice.

In our last wave of research, a significant number of advisers stated it is either important or imperative that offshore investment products are able to facilitate payment of adviser charges. And there are some providers whose efforts in this space have been well received.

Having the option is clearly important but a large number of advisers are (perhaps unduly) influenced by their clients’ preference for the advice charge to be taken from the product. This is best illustrated by the third of advisers commenting that the ability to facilitate adviser charging was a “critical” factor in solution selection. Many of these advisers are prepared to exclude providers unable to accommodate it.

As we all know, good advice is more than giving the client what they want, and if paying for advice through the product in any way compromises the outcome, then the client needs to know about it. For instance, in the case of a bond where the client is investing for income, taking 1 per cent will reduce the tax- deferred withdrawal capacity to 4 per cent, which is clearly not in the client’s best interest.

In an environment where every product is clean priced, there will be an increasing need to take into consideration tax implications of how the fee is taken. The mechanism for payment is every bit as important (in some instances) as the solution itself, and may need to be re-visited as client circumstances change. Having the conversation once and duly bowing to the client’s desire to avoid the pain of writing a cheque will not be good enough.

Clients may still choose to ignore your advice, but you need to spell it out clearly, effectively and, more than ever, record it. The customer is always right – unless they are wrong, in which case they need to know it.

Phil Wickenden is managing director at Cicero Research

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Phil in the case of a bond where the client is investing for income, whilst taking the OAC can reduce the tax- deferred withdrawal capacity the client saves to have to pay that fee from his other resources.

    Therefore its neutral to the client, i.e. the client has £1 less ‘income’ available but doesn’t have to pay a seperate adviser fee of £1.

    For example,

    A client invests £100,000 into a bond and takes £5,000 ‘income’ but has to pay a £1,000 advice fee. He is left with £4,000 and 19 x 5% withdrawals available.

    Or he invests £100,000 and takes £4,000 ‘income’ and elects for the £1,000 fee to be deducted from the bond. He is left with £4,000 and 19 x 5% withdrawals available.

  2. In relation to choice, if a Bond provider doesn’t want to offer the facilitation of ongoing advice fees that is fine, but that provider must then realise that it has removed choice from consumers who want to pay their adviser via this mechanism.

    The merits (or otherwise) of percentage based charging is up for debate, but it should also be understood that the business models of many advice firms are that their ongoing advice fees are percentage based. If a client doesn’t want to pay an adviser’s fee in that way, an adviser can choose not to deal with that client, or they can choose to deal with that client but exclude providers who don’t offer this facilitation. The administration of percentage based fees that vary from month to month other than by this mechanism are, quite frankly, a pain in the behind for the adviser and, more importantly, the client.

    By the way, advisers have needed to take into consideration the tax implications of how the fee is taken ever since RDR kicked in. It is not something that is “an increasing need”.

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