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Price versus value

In his letter to Money Marketing last week, Julian Stevens invited me to describe the fees that we charge for our services.

I am happy to do so. I do, however, want to warn Julian against the risk of falling into the trap of looking at price in isolation. That would be meaningless as we need to look at the relationship between price and value.

We recognise that there will be other firms who charge more than we do and there will be firms who charge less than we do but that does not matter.

That is one of the delights of the UK intermediary market, it is dynamic.

Of course, I could have invited Julian to take a look at our client agreement letter which we publish on our website but that would also be an incomplete picture because each client or prospective client gets a presentation of services so they can judge whether our price is good value or not.

Advice

Our focus is on advice because that is where we know most value is added. We start by sending out our welcome pack and inviting the client to a first meeting at our expense and without obligation and subsequently the client receives an engagement letter setting out in detail what we are going to do for them and how much we are going to charge.

We charge for advice in the form of project fee because we prefer that to an hourly rate charge and feedback from our clients supports that although I concede that for other IFAs an hourly rate may be more appropriate.

That fee is payable by invoice on the satisfactory completion and delivery of an advice report to the client. The amount of the fee will depend upon a number of factors and those factors are input into a software calculation package we have designed in house.

This ensures we consistently charge for the work to be done, regardless of who delivers the advice report (there is too little space here to go into our team-based approach to the delivery of advice but if Julian is attending the PFS conference in November he can hear me speak about the details there).

Value, expertise, profit and risk are all factored into the advice fee. The intensity of this work, as most IFAs know, is enormous and like others we are constantly trying to improve what we deliver.

Project fees range from £450 for advising about a relatively simple thing such as establishing a regular-contribution pension plan, circa £800-£900 for a review of a number of investment and pension arrangements and advice about what to do with them and up to around £2,000 for more complex advice or financial planning work. My team tell me on a regular basis that we charge too little.

Our intention is to increase these charges because, as I said earlier, this is where the value is and in return to reduce our implementation fees, although I confess we are currently struggling with that, as you will see below.

Implementation

This is where most of the risk is. Have you noticed that the environment in which we work is based on products rather than advice but perhaps that will change with the introduction of the RDR?

We currently charge 2 per cent implementation fees for new investments, 0 per cent obviously where we are re-registering assets. We would love to change this away from a percentage to a fixed monetary amount. I suspect our next step will be to reduce this to, say, 1 per cent at the same time as we increase advice fees.

Over the years, people have asked why it costs 10 times as much for an investment of £100,000 as it does for an investment of £10,000. Perhaps part of the answer is that it involves 10 times the risk.

All of the good research I have read suggests that the client places least value on the selection of a product and, let us be honest with ourselves, it is pretty easy with the research technology available to the IFA. Most clients’ value is placed on the delivery of advice and planning, particularly financial planning strategy.

I wonder why then that most of the price is centred on the delivery of product solutions. I believe we need to change this.

Review

Every Monday morning, our clients receive an ezine newsletter updating them on important financial services issues and detailing what is going on in their advisory firm.

Each quarter, they will receive a valuation statement and our market commentary and our newsletter. At the moment, we are moving to a system where they can get consolidated valuations through our website 24/7.

Half-yearly or yearly, they will get a review report and that will be presented to them at a face-to-face meeting. This, as you can imagine, is intense and we reckon is why we have held on to existing clients and acquired new ones during the last couple of difficult years.

We charge 0.5 per cent of the value of the assets, excluding cash, direct equities and direct property.

We have just introduced a service where they will receive monthly review reports and, of course, we will charge more.

Mechanism

Actually how a client pays is, I believe, less important than how much they pay. But the RDR adviser-charging debate continues to focus on mechanism. A pity really because I believe it does not matter that much. What I do feel strongly about is that it is me and my client who should determine the price, and value, of my services and not a product provider.

I really do not see how I can describe myself as independent if my price is determined by someone else.

Nick Bamford is chief executive of Informed Choice

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Comments

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

  1. I respect Nick’s integrity in consistently defining independence in terms of detachment from products and product providers and I am sure his firm does a competent job. However, it is not a justification for charging set up fees as a percentage of value irrespective of funds invested by saying that there is more risk. There is no logical support for such a proposition, especially for those advisers that use model portfolios. In any case, on can argue that risk is dealt with by PI insurance and the cost of PI insurance goes up with turnover, not funds under management, so if you charge higher fees, you get higher PI costs!

  2. I think what it all comes down to is can we jutify what we do and charge to a client. Can we sleep at night with what we charge and are we willing to stand up and jutify it in front or our peers and the FSA.
    I am willing to do all the above and my practices are broadly similar to Informed Choices it woudl appear (and I suspect Julian’s too) I take on board what Mark has said about £10k compared to 100k, but this is the model we work to and clearly explain to clients. Larger cases are often quoted at X%, but if we are doing additional business for a client, I will automatically discount it, often with the client being surprised I have done so as it is then less than our tariff (they often would have been happy to pay the tariff fee). I am willing to accept a client asking me to charge less and negotiate even lower, but I AM in business to make a profit and if someone is happy with my quoted fee and does not want to barter, then that means I can do a little Pro Bon work as a result.
    If you can justify your charges, they are clear fair and NOT miselading, than we can all sleep at night.

  3. How come they get to advertise on this site? 🙂

    A % based element in the tariff is something that, for one reason or another, clients understand very clearly and agree to. Partly, yes, it’s because that’s where the advice sector has come from, and partly because that’s where the investment/asset management industry is.

    Whilst I do not have an in-depth knowledge of Nick and Martin, the advert above combined with what I do know of them (Chartered/Certified, been around a bit, authoring books on the subject as well) suggests to me that this is pretty good value. (It also seems fairly transparent and clearly, not Provider led!)

  4. I note Mark’s comment and tend to agree with him which is why I think we will move shortly to fixed fees for implementation work. I do however believe that if the logic is correct it would have to apply to review fees as well. Is it justifiable to take a review fee as a percentage of assets under management if it is not fair to take an implementation fee as a percentage? That would strike me as being contradictory.

    Readers views would be good to hear but can I ask that we stick to the value discussion and not get caught up in a price war?

    regards

  5. I think Nick is right in general terms and admire the clear policy/vision he has. I also use fixed fees menus for advice and 0.5% for funds under mgt. my only slight difference is that I believe in capping my 3% implementation investment fee at £3,000 on the basis the time spent establishing a £100k portfolio and £200k portfolio is the same.

    My only tiny question mark would be on the higher value/higher risk view I believe the risk versus time for larger investments is a misnomer especially if you use a risk profiler which is signed by clients before a portfolio is established and undertake an annual risk review.

  6. This is really good feedback. I really do think the implementation costs should be the lowest part of the cost to the consumer with advice/planning and review services charged at a higher amount but I still struggle with the environment in which we operate where the regulatory focus and PI market focus is on “products sold” rather than “advice delivered”

    Our business model is moving towards one where we charge a premium amount for advice and planning, little or nothing for implementation of product solutions and a higher amount for review services. Has anyone achieved this and been able to do so without expressing implementation and review fees as a percentage?

  7. I do agree with Nick that whatever policy you feel you can best justify, you should be consistent. We nearly always charge time based fees for planning and implementation (always estimated in advance so in effect capped, which gives clients security) and we charge fixed fees for reviews. So my client with the largest portfolio we handle pays me 0.02% per annum as a review fee if you want to measure it that way. His work is still perfectly profitable because he takes up my time as allowed in the fees agreement and no more and the hourly rate and retainer rates are worked to cover all the business costs and a profit.

  8. Following on from Tony, How about offering an annual % service fee, but subject to a minimum and maximum £ amount? This could be based on Q,H, A review requirements/assets under advice, etc.

  9. I broadly agree with many of the points above, particularly that the RDRs focus on payment delivery truly misses the point and what we should be focused on is customer agreed remuneration.

    However what troubles me is that I think it will have the long term effect of reducing access to ‘quality’ financial advice, at the time when consumers need it most.

    Given the shrinking state provision, whether in terms of increased state retirement age, reduced benefits and/or long term care charges and the increased burden of taxation is likely to continue as we try to cut the deficits and deal with the demographic timebombs, I would argue that need for ‘quality’ financial advice is at it’s highest and should be the FSAs primary goal.

    Whether it is ‘fair’ financial services offers a progressive charging system, meaning if you have more, you pay more. This gives firms more scope to deal with ‘pro bono’ work or add value to non-HNW clients who desperately require guidance.

    By changing to flat fees, some clients (by definition the wealthiest) will see a reduction in costs, whilst others (the poorest) will see an increase, to balance the changes out and keep firms in business.

    As basic economics tell us, increase the price and demand falls as people are less able to afford it, so overall IFAs moving to flat fees MAY reduce access to financial services.

    It is important to stress that my firm is primarily fee based (including offering protection via fee), has fully embraced RDR, is working towards chartered status for ALL our advisers and is pretty much as RDR ready as you can be – so this is not me asking for the old world to continue. Nor am I a Labour supporter or communist – I just feel that as an industry we should be properly debating the unintended consequences of our proposed changes.

  10. All good stuff guys.
    In agreement with most comments here.

    We charge a fee (cheque) for the written financial strategy/cash flow forecasts/goals etc.
    Normally £2-3.5k depending on work involved.

    Implimentation into passive/wrap etc normally 1-2%, and 1% fee ongoing to review/reducing with size of pot.

    I think the main thing to stress, is how do you truly value transforming someones life by getting them to think about what they really want to do with their lives for the first time.

    And then DO IT!

    We provide the peace of mind then that they are not going to run out of money before they die, and review every year.

    Working with dentists & doctors, they usually have too much pension/policies etc, and we save them a lot of money so they can put this elsewhere/spend.

    On many occasions on meeting a (say) 50 year old, who anticipates working on flat out to age 60 ‘to get my years in’, they end up working part time/retiring at age 55.

    This is THE JOB ! The rest is detail.

    Obviously the FSA dont understand this way of working!

  11. Blair Cann, M Thurlow & Co 20th November 2009 at 11:27 am

    I hold certified status and my modus operandi is very similar to Nick’s as are the charges I make.My view is also that charges must be justified by offering value and it is the client’s (not my) perception of value that is crucial. Naturally we would seek to establish that value.
    We also add paragraphs to our estimates i) suggesting the client may wish to take the estimate to another IFA and obtain an alternative quotation to satisfy himself/herself that our quotation is competitive ii) pointing out where a product is recommended that if we offset, the client is still paying for our services via allocation,amc or whatever
    I suspect many of us operate in a comparable manner but personally I would not be prepared to preach to my peers (and I am not suggesting anyone else is) about how they should operate-if their clients are more comfortable with commission and understand where it is coming from then so be it.
    Can I just say this is a very interesting link and hearing everyone’s views is very useful

  12. I worry when people feel the need to justify what they are charging. The implication is that deep down they know that they are charging too much but being basically honest they want to believe that they are being fair. The solution is often activity for its own sake – do lots of things and argue that value is being added.

    what I charge is between me and my clients and has nothing to do with anyone else.

  13. We charge in an identical way – not because we’re clever but because we checked out what everyone else was doing first. Our implementation & management fees are both 1% – subject to a small minimum. In the old days I used to rant about quantum fees, most famously challenging the then CEO of SEI – at an industry dinner – to tell the assembled crowd at what level a % charge became commission, given that he held that 1% was always a fee. Howard Flight used to maintain his unit trusts were fee-based, a fee of 1.25%. I guess Gordon Brown’s taxes are fees then, a soon-to-be-50% fee.

    As Joe Consumer and he will tell you that a fee is £.s.d., its not X%. Go on – ask your Mum. To get round my capitulation we don’t talk to clients about fees, we talk about our ‘charges’ instead, and within the charges we do charge explicit fees (in £.s.d.) for planning, property or tax work. SIPP set-ups, for example, are a flat fee.

    What I do not agree with here and elsewhere, is the application by IFAs of quantum-based f.u.m. charges when client money is left either passive, or worse, with an external discretionary manager. We charge 1% because we manage money (we have two IMC-qualified managers), and we break down the constituents of the 1% in the fee agreement. Those who add 0.5% – or worse, 1% – then hand the money to Dimensional et al. on the basis they can’t do any better are charging clients for what? The platform makes its own charge for aggregated valuations, so what’s the IFA doing?

    As we’ve switched to explicit charges we’ve lost one £x million SIPP client who refused a charge of £600 for a £25k SERPs report, and had a couple of confrontations with other clients, but I simply invite them to examine me, my firm & our processes to see if the revenue is exorbitant. We are not cheap and have no intention of providing that business model, but we do have a responsibility to outline and describe to clients exactly what our costs are (from web-hosting to £15k FSA fees) and what our profit model is – because if we are not embedding value in the firm we are just not interested, and we make absolutely no apology for that – clients don’t complain when they know what they are paying for. Charging 0.5% just because you can is no justification.

    Charge-based advisers, no bull, no obfuscation about fees or where the cost is billed, just a charge. My Mum and all her friends agree.

  14. I like John Blackmore’s comment he is absolutely right the charge is between the adviser and the client and no one else’s business and hence “Adviser Charging” but he mistakes the motive for the debate here. Adding value is indeed what it is all about and that is only partially activity based.

    However reluctance to disclose might also be perceived as fear of being too expensive.

  15. @Nick Bamford – Sorry if my post came across as critical of this debate – it was not intended to be.
    I appreciate that you were writing in reply to Julian Stevens. As a debate this is fine but I do have concerns that we will soon be going from Commission bias to fee padding. Adding value is what it should be all about but commercial realities and FSA ignorance may well all activity for its own sake to become common – with higher and higher charges the result.

    The problem with the attitude being imposed by “the guardians of decency” is that what one person sees as decent another sees as corruption. One adviser “re-balances” another “churns”

    My solution would be to have Independent Financial Advisers ( perhaps 5% of the current force) qualified to QL 6 minimum and paid directly ( i.e no 3rd party involvement) by the client with fees agreed privately by the client.

    The rest of us could continue to sell/advise with Q level 3 on a commission ( Maximum limited) basis or fee ( maximum limted) from a panel of cost efficient Regulated Products.

  16. I was very interested by John Blackmore’s comment about creating 2 tiers of adviser as his suggestion almost exactly co-incides with my response to the RDR. I am happy to live in his “top 5%” tier and know that there will only ever be a minority of us working like I do. But I am concerned that the cross subsidy element referred to in other posts should not be lost, So a better regulated version of what happens now is worth keeping. However, we do have to get rid of the element (and they are not just banacassurers) that sells everyone a bond on 7% plus commission and pretends it is cost free to the client. I suggest that this is achievable via a tightly drwan version of CAR, with all applications for products being accompanied by a simple document saying that the client agrees to a £.s. d amount being taken from his investment/premium to pay the seller for services that are actually described.

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