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Put focus on fees

CP121 to some is an android in Star Wars, to others a portent of impending doom. My opinion is it is just plain common sense. The first thing I suggest IFAs do is read it. It stretches to over 100 pages including the annex pages but the issues are too important for you to base your opinion on the hyperbole being spouted from some quarters.

IFAs have a fantastic opportunity to heed the issues raised by the substantial research supporting CP121 and evolve their service to regain the public&#39s confidence.

Polarisation splits advisers into two camps – tied agents and independent. The quality of advice provided by tied agents is severely restricted by their product range. Some companies have substantial gaps, which could lead to the client being sold an inappropriate alternative.

Even worse are the companies which have felt compelled to provide a certain type of policy purely to fill the gaps in their product range. Critical-illness plans are a prime example of this. Despite these pitfalls, 80 per cent of the pop-ulation deal with tied agents.

The research also shows that although the public believe in the imp-ortance of independent advice they do not trust the current IFA sector to provide it. Therefore ,polarisation is not delivering the financial advice that the public needs or wants. In my opinion, CP121 solves both of these problems.

First of all, the group of people who simply sell policies will now have a wider range to choose from. This surely has to be better for the public at large. The IFAs who currently just sell policies will not have to change. Their service is not worth paying much for and the new definition of independent advice will not apply to them anyway. The new independent sector will be made up of IFAs whose advice is more than independent, in terms of product choice, it is impartial.

The creation of a new independent sector that regains the public&#39s confidence is very much an integral part of CP121&#39s objectives. The reason for the lack of confidence in the impartiality of current IFAs&#39 advice is that they get paid according to what they sell. The only way to convince the public of the impartiality of the IFA&#39s advice is if they charge for their time and expertise.

These are the issues at the very heart of CP121. The challenges facing IFAs who value their independent status is to make sure we are part of the decision making process to iron out the one or two rough parts of CP121. Unfortunately, the current representation is margin-alising IFAs altogether. It is time for quality IFAs who perform a holistic financial planning service to their clients, that is not biased towards commission-based sales, to stand up and be counted.

Most IFAs will face the decision of continuing with what they currently do and dropping the word independent from their title or meeting the guidelines in CP121. There will be substantial advantages for IFA firms that remain independent.

They will increase their profit.

They will have better cashflow.

They will have higher self-esteem.

They will be paid according to the amount of work that they do.

They will be perceived by clients and peers as more professional.

They will deal with more interesting cases.

They will have an exit strategy because the value of their business will increase considerably.

The reason that I know all of this is that these are only a snapshot of some of the benefits that Baxter Fensham has derived from switching from fees to commission.

IFAs that understand the merits of charging fees but are daunted by making the transition should get in shape now. There are three particular areas to address. These are devising a service that is worth paying for, re-engineering of your office infrastructure and training all staff in their new roles.

In the remainder of this article, I will concentrate on devising a service that is worth paying for and will address the other issues in follow-up articles. CP121 is full of research into how much the public will pay for financial advice.

A lot of IFAs are worried by how low those figures are. If anything, I think they are actually too high! The question asked was based on the current service provided. If the current service is finding a commission paying policy to sell to justify the time you have spent with a client then I would argue that this is hardly worth paying anything for. Your service must deliver value for money, meet clients&#39 objectives and be worth paying for.

The service you provide should be holistic financial planning and not simply financial advice. Financial advice tends to be reactive and problem-solving. Often, this leads to clients treating their financial programme like a shopping trip.

They proceed through life buying policies and hoping that when they get to retirement there will be enough in the trolley to look after them. If anything happens to them prior to retirement – death, illness, accident, etc, then they rummage in the trolley hoping that they have something in there that will help.

Financial planning is about ident-ifying a client&#39s objectives, establishing how far their current arrangements have got them on the path to achieving their objectives and devising a strategy to fill any gaps. The crucial element is the ability to measure and interrogate their current position against their objec-tives. There are a number of software tools available to assist with this.

This interrogation often throws up other objectives particularly protection issues. Most important, it provides a context within which all advice can be given. Your service must deliver an advice pattern that is holistic.

How many clients have reciprocal wills creating an inheritance tax prob-lem or, worse, no will at all? How many clients have a clearly defined invest-ment strategy and understand the risk of their investments and pensions? How many clients have their existing pro-tection arrangements placed under appropriate trusts or are they com-pounding an IHT problem? How many clients have considered overpayment to daily interest mortgage as a way of easing the burden created by an underperforming endowment?

There are countless areas where IFAs can deliver value that does not rely on a commission-paying policy as the solution.

From the letters, emails and conv-ersations I have had with IFAs, it is abundantly clear that we have sufficient calibre finally to help this industry evolve into a profession.

There are hurdles to overcome in making the transition to fees but they are not insurmountable and the benefits are worth the effort. Help is available to assist your transition from commission to fees from various agencies, including ourselves.

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