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Reid: Charging 3% plus 0.5% ongoing will not work

After sitting for what seemed like hours on end, the generic advice standards steering group arrived at one significant consensus – that the right to define any service as advice rests with the consumer, not the provider.

The launch of the Money Advice Service should be welcomed by all of us if it achieves its aim of stimulating interest in all things financial. Whether this leads on to enabling people to do it themselves remains doubtful.

Some time ago, I found myself at the FSA discussing financial education. I suggested money was being wasted on trying to cover too much ground when the core issue in life was one of risk. The recent paper on risk and suitability provided evidence to back up my statement.

The only problem back then was that people were more interested in being seen to do something as opposed to actually delivering a long-term solution. Ego won over intellect, if you like.

The MAS follows on from various exercises that, if anything, prove just how difficult this type of education is in reality. We all need to guard against talking about or promoting concepts in a manner that is alien to our target audience, no matter how good it sounds to us. We are not the best judge and neither is the MAS.

Please do not tell me focus groups will help with this issue. They will not, as they do not contain the people we are trying to engage.

The MAS’s use of the word “free” to encourage users is what really riles me. It is not free, the industry is paying for it. Just how difficult would it have been to have had a strapline saying, “Funded by the distributors and providers of financial products and advice, no other taxpayers have contributed to the costs”?

To say it is free is outrageous – certainly not clear, true and not misleading, as the FSA would say. Perhaps a class complaint to the Advertising Standards Agency is needed?

Having been involved in the Personal Finance Society’s Citizens Advice project since inception, I fought long and hard to ensure all booklets referred to us as “donating our time and expertise”, to show our advice is valuable. Call the advice free and we walk.

Whatever happens to MAS, it will never be the only solution and we must work together if we are to solve the key issue of financial engagement.

I am sure we have clients who look at our charges and wonder what we did for them this year. However, simply to link activity with value for money is to ignore the fact that the fee enables access to professional advice from someone already well versed in your financial situation and goals.

We need money “to put the lights on”, to do the ongoing research and to remain current. An IFA’s costs are about more than the time on the clock. As we move towards 2012 and beyond, we will all be under pressure to define our costs and services. Some people will try to barter but that is best dealt with by asking them if they would barter with their own services or if their employer would.

They may prefer a service where they pay as they play but they will soon complain when we charge for rediscovery and reanalysis as the FSA expects us to do when there has been a break in service.

An IFA’s ongoing service, where clients pay for us to look after their assets and provide advice, is like a warranty on electrical products or the AA – you hope not to need it but it delivers peace of mind.

A conversation I am due to have with a client will take this no-use, no-pay view but given we wrote off excess time when we took the client on, I will not be for moving my charging structure as pacification. We may drop the client on to a lower level with no proactivity but that will involve ongoing cost as we do not offer the pay-and-play model.

It is interesting to watch the trends in fee charging. The default of 3 per cent plus 0.5 per cent trail has no science behind it and I am yet to hear a convincing argument as to why it was chosen.
The truth is mathematical, or should I say life company actuarial. Three per cent plus 0.5 per cent is equivalent to 6 per cent up-front, which is 5 per cent plus a Lautro 20 per cent uplift. When it comes to defending charges, we need a better reason than “we have always charged 3 per cent plus 0.5 per cent”.

As I said above, we need to heed the perspective of the consumer. I hear much talk of client-centricity but see little evidence of it in most adviser/ provider websites.

In the words of Sam Walton, the man who brought us Wal-Mart: “There is only one boss. The customer. And he can fire everybody in the company from the chairman down, simply by spending his money somewhere else.” That sums it up for me.

Robert Reid is managing director of Syndaxi Chartered Financial Planners


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There are 32 comments at the moment, we would love to hear your opinion too.

  1. Very good article.
    As to 3% plus 0.5% as fees may not be ideal, but if it is customer agreed (advsier charging) it is a start, but it takes time to transition both the business AND existing client attitudes.
    As for the MAS, very glad to see Mr Reid thinks the idea of the MAS is fine (I do too), but delivery of message is totally WRONG. It is not “advice, nor is it “free”.
    Who will complain to the advertising standards agency and will they take any notice anyway?

  2. Aifa’a silence on the MAS advert is reprehensible but sadly not surprising. This is exactly the sort of issue they should be leading on but lack the ‘nous’ to do so. Bunch of complacent cowards IMHO.

  3. It rather depends on how wealthy the client is. 3% plus a half is outrageous if £5 million is being invested but loss making if it’s £25,000. In any event, I thought the FSA had made it clear that all charges needed to be representative of the actual work carried out rather than just being a standard model operated by the practice.

  4. I thought the FSA had made it clear that all charges needed to be representative of the actual work carried out…

    Thats one way to look at it but it doesn’t take account of the lifetime liability of giving advice. I need compensating for the fact I could be prosecuted for poor advice at the age of 90!!

    A life of PI Cover and protection doesnt come cheap!! All risks need to be priced and the cost of getting someone to the point of being able to do the work.

    % models do recognise the scale of the potential risk to some extent.

  5. Lindsay Lockett 30th June 2011 at 2:00 pm

    I have already made my complaint about MAS to the ASA, I suggest all reader do the same. My issue was about the word “advice” in MAS, the suggestion it is “free” and the use of “unbiased” in their advert when that is also a term that has been promoted and funded by the IFA community.

  6. Now that Lloyds is going to make so much more profit what will they charge or they going to give ,free advice, to their customers no chance As before charges will be well and truly hidden They will probably get 2% per year and say it is a service charge.

  7. The point I tried, and failed to make was 3% + 0.5% has no root in costs of providing or indeed the risk in giving advice. This combination was provider led and I agree that lower amounts may need to be charged at 3% if the amount is under £50,000, I believe that a level charging structure 1% +1% is  more akin to along term relationship.

  8. Quite amusing really !

    Lets look at what we want to charge and then work out what we are going to do for the money.

    Or lets see how long we take to do something then work out how much we should then charge.
    Might be a little better to find out what the public
    wants from the industry then try and work out how to deliver that at a profit,

    As for the MAS and its issues perhaps it just reflects what the regulator thinks of what we do and what we are worth. It also shows how little impact the various trade representatives – bodies and individuals – have actually had on the world we now inhabit.

  9. Totally agree with Robert’s last posting. The emphasis now should be on the service provided both now and ongoing rather than taking a high fixed amount upfront regardless of the amount invested and the amount/degree of work carried out.
    Nothing wrong with charging a 1% annual fee as long as it is justified i.e, meeting at least twice per annum and rebalancing portfolios, completing new risk profile questionnaires, updating fact finds, reviewing overall financial position etc.
    Simply sending annual valuations in the post doesn’t even warrant a 0.5% annual fee.
    Initial work should be recorded and preferably charged by the hour, although I have no problem with a 1% initial fee as long as the client agrees to and signs for this alongside the annual fee.

  10. Neil F Liversidge 30th June 2011 at 2:35 pm

    @ Simon Burston – As a member of the AIFA Council I would invite you to engage intelligently with me as to what AIFA should be doing. I presume you are a subscription paying member? We welcome – and actively seek – all input but we don’t have any God-given funding source so if you are not a paying membmer perhaps you’d like to put your money where your mouth is? Armchair warriors don’t help win battles.

  11. Neil F Liversidge 30th June 2011 at 2:43 pm

    Sorry Rob, 3% + 0.5% is not the same as 6% up front because with 6% up front the ‘adviser’ has grabbed the money and has no incentive to deliver any ongoing service, and generally in my experience they don’t. For that reason we’ve always run on a trail model and have let go a series of consultants who were not happy with the ongoing requirement to work for their money. If we don’t keep the client happy they can turn off the trail or take it elsewhere and they know it, but none ever has. It’s not true either that there is no ‘science’ in the model. It allows us to deliver a good level of ongoing service with a written ‘no churn’ guarantee whilst making a fair profit. We’re in it to make a living, not a killing. Over £250k we charge 2% + 0.5% and over £500k it’s 1% + 0.5%. We went through this in detail at our TCF interview and had a totally satisfactory outcome.

  12. @ Neil Liversage.

    Surely when you put yourself forward for the AIFA job you understood what representing the adviser community entailed ?

    If you now feel the need to ask then perhaps you are not in the right place ?

    Most of the stuff being said or done by the so called representative bodies is very biased in favour of the needs of various entities with specific different vested interests than those of advisers.

    Meeting sales targets for education courses or meembership numbers does nothing to help advisers prepare for the brave new service world that the FSA wants to crteate with the RDR.

    You are clearly involved in a service proposition so why not use your experience to help others – no provider sponsorship or funding needed for that contribution – you could even charge for the experience.

  13. Neil F Liversidge 30th June 2011 at 4:22 pm

    @Phil Melville – I’m amazed that you seem to think that once elected we should no longer seek input from those we represent. Politicians may act that way but I don’t. Or maybe you think the job ‘entails’ accepting uninformed criticism without correcting it? If you’ve seen my contributions on some other forums you’ll know that I’ve made a number of our documents available to other IFAs and had very good feedback as a result. Good job for you this isn’t Wimbledon old boy!

  14. Neil,

    I did not suggest it was the same in terms of proposition I was reflecting on why 3%+0.5% came about it was not designed by IFAs but by providers profit requirements.

    “The truth is mathematical, or should I say life company actuarial. Three per cent plus 0.5 per cent is equivalent to 6 per cent up-front, which is 5 per cent plus a Lautro 20 per cent uplift”

    Perhaps I should have added that the calculation is based on average persistency.

    As to the comments Re AIFA you dont need money to make comment its their silence that many of their members find unacceptable

  15. Market forces old boy 30th June 2011 at 6:10 pm

    If we are to move to fees why are we debating 3% plus 0.5%. In a free market economy who should regulate profit, cost or value for money other than market forces? If I go to a QC, surgeon or a top accountant (you know one of those firms the FSA pay thousand to) and I then say your fees are too high what would they say? If I went to Hector Sants and said I think £800,000 pa is rather a lot to pay a failed regulator, what would he say? They would say is all down to market forces old boy!

  16. as somebody who works for a life company Rob Reid is exactly correct. The 0.5% trail was paid to compensate for giving up an “entitlement” to initial commission rather than paying 6% up frount. Assuming the product lasted 5 years, the IFA would do a little better out of it and it wouldn’t cost the life company so much in factoring.

    So 3% + 0.5% became the norm and to some extent has stuck. Not relevent now with factory gate pricing etc, but it was certainly never driven by the adviser “community”.

    What is interesting with flexible charges is the number of seemingly “high end” advisers who have moved onto a 1% trail model and still take 3% – 5% initial.

  17. Neil F Liversidge | 30 Jun 2011 2:35 pm 30th June 2011 at 6:30 pm

    First of all Neil credit where credit is due you have done more than most to support the IFA cause but please don’t stick your neck out in support of an unworthy and lost cause …AIFA! Re your comments @ Simon Burton. AIFA is a chicken and egg situation. I resigned from AIFA and a great many others have done so because of their anti grandfathering stance. Just as Israel won’t hold peace talks with people sworn to their destruction, IFA’s won’t support or fund groups who hold views (anti grandfathering) that will destroy independent advisers. So there you have it, AIFA has automatically alienated circa 10,000 IFAs from their ranks of support. If AIFA has a policy that supported grandfathering that would be a good place to engage intelligently!

  18. Simon Burston! Whilst i accept the sentiment ,the AIFA is a trade body trying to defend with limited funds a whole tranche of bully boy legislation from all directions.
    At this rate come 2013 their wont be a financial industry to regulate, but that wont stop them. The’ll just have regulators, regulating a regulator (Wow) and as most normal people seeking a decent return on their capital suddenly realise that after costs have been applied they should have kept the money under the bed, somebody high up in Government will realise costs on top of costs killed the pensions, savings and investment industry. Oh Errr!!

  19. The value of independence 30th June 2011 at 6:43 pm

    Should a rgeulator whose CEO is paid in excess of £800,000 and who awarded themselves a £20 million bonus in the year the banks failed, be allowed to price your fees?

    Tell me what price do your charge a client for subjecting yourself to:

    1. Unlimited Liability – your house and future at stake

    2.Retrospective legislation and application of rules and complaints

    3.£150,000 fines without right of appeal

    4.Acceptance of hearsay as if fact, no rules of evidence or binding or persuasive Authority

    5. No longstop

    Surely your fees should reflect the risks you run?

  20. Nothing like debating shutting the stable door after the horse has bolted. Maybe its an idea to work out base costs, desired profit etc and then work out how many hours a week/month/year we can work, then work out the hourly rate….

  21. Lets all go Professional 1st July 2011 at 11:31 am

    Rob Reids maths are correct even I know that as a Pensions Adviser (Chartered mind)!

    I fully agree with the value, anonymous 6.25 and market forces comments – they are spot on.

    Having dealt with cases where Barristers earn £600kk year on year, surgeons on £350K and Lawyers (in the heady days) £300k – why are our Client lead incomes subject to a Cap.

    The RDR is coming – it is a train that will not stop and will lay waste to the advisory landscape.

    The hallions who rip off clients will reduce in numbers but they have been over the last 10 years.

    The 1% ongoing client annual fee model for all clients is less scientific in my opine than Robs calcs. No doubt many like 1% a year cause its higher than 0.5% and no additional work is required.

  22. Cant help feeling that these types of discussions are a complete waste of time. It is too late for our community to change any of this, so why waste valuable fee generating time discussing it. AIFA let us down from the start, insurers let us down and we didn’t fight hard enough. Time will prove us right, RDR has killed off independent advice for millions of clients.

  23. Another Pissed Off IFA 1st July 2011 at 12:32 pm

    Even the following statement which was lifted directly from the article is not right:: “Funded by the distributors and providers of financial products and advice, no other taxpayers have contributed to the costs”?

    The cost of regulation, MAS and all the other ‘big ideas’ dreamed up by the Great and the Good are paid for by the tax payer, i.e., the consumer. To paint the picture that somehow distributors and product providers have paid for something is nonsense. IT IS ALWAYS THE TAX PAYER that pays for stuff. Businesses do not pay taxes, their customers do.

    That is the message that needs to be got out. RDR, MAS and the rest is all being paid for by the consumer. When that message is received the consumer may then have a different opinion about it.

  24. Andrew Simmons 1st July 2011 at 2:23 pm

    Surely the problem is charging people by percentage. This is unfair as clients will pay differing amounts for your time. No consistent approach

    The answer must be cash amounts. You will have to disclose as cash so why not charge a fixed amount.

    Maybe you like to say 2 or 3% but feel a little uncomfortable stating it is £4000 and a grand a year to look after their £200k. Remember only 27% of the Uk population understand percentages, the other 79% do not have a clue. Treat them fairly.

  25. Balanced View 1st July 2011 at 6:10 pm

    Most sensible compliance oversight would say that charges must be comensurate with the work undertaken.
    My charges vary from 3% initial plus 0.75%p.a. for ongoing service, down to 0% initial and 1.00% p.a. for ongoing servicing. All this depends on the amount of work I have to do and the value of contract. I would not charge any initial fee for larger portfolios or those sums where it is not ecomonical to invoice.
    Where advice cannot be whole of market due to wrapper fund choices, the ongoing fees may be reduced further.
    I do not at this time offer DFM, but this would be launched at a lower ongoing charge and can be delivered to the client for a TER of up to 1.86%p.a. Other DFM’s are considerably more expensive and less transparant than the one I am looking at.

  26. Simon Kershaw 1st July 2011 at 6:53 pm

    I am surprised that this element of the remuneration debate is still ongoing.

    It is well known that the regulator has not given guidance on appropriate levels of commission/remuneration for IFAs, arguing that this was covered in principles based governance.

    The PIA (remember them) did give strong guidance 1997/8 on commissions for drawdown business both new and drawdown to drawdown transfers. These were 3% + .5% trail on new business and 1% + 0.5% on transfers. That was enough for me to model all our investment business on this remuneration shape.

    Over the years I have occasionally looked at our new business book and mentally wished I had been greedy – momentarily. The many tens, even hundreds, of thousands of pounds I have rebated over the years seem to have borne fruit in the form of client loyalty – and trail income.

    The onset of RDR has unfortunately brought on the rise of the born again product flogger. In the guise of New Model Adviser or wealth manager the mantra is consolidate and technologise. Much of this has been to wrap propositions but some has gone to dubious destinations for dubious reasons. I fail to see how 7% + 1% is TCF – and I am not talking dodge UCIS or the boys from Alicante. Perhaps the FSA might like to ask Canada Life Int for a list of all IFAs who routinely creamed off these levels of commission. Likewise SIPP providers who paid 5/6% and then allowed TIP purchase paying another 5/6%.

  27. John Blackmore 3rd July 2011 at 10:15 am

    @ Lets all go professional

    why a cap ? perhaps because there is no justification for such charges – by Barristers, Surgeons and certainly IFAs.

    The market for truely complex and expensive advice is really very small. The vast majority of clients do NOT need complex advice and would certainly be daft to pay more than a few hundred pounds.

    There is a mass market that could have been profitable if the FSA had not foolishly increased the costs that each adviser/salesperson must bare.

    RDR will mean that there are fewer advisers and those that remain will naturally want or need to increase their charges to cover ever increasing FSA costs.

    Unfortunately I doubt if the majority of those who remain will be worth these higher charges.

    So having caused a charging explosion the new regulator will feel obliged to act and yet more advisers will be forced out.

    Only those who deal in genuinely complex advice will survive as Independents.

    The rest should plan to tie, go restricted or leave

  28. Hi Simon – and Neil – I think Robert’s point re the word ‘free’ is one we could try to get MAS to concede – unlike the ‘advice’ illogicality and the ‘unbiased’ plagiarism. I fancy giving this a tweet. there are plenty of IFA’s who might respond. Let’s see. @tombaigrie

  29. Incompetent Regulators Awards Team 4th July 2011 at 10:52 am

    What a load of tosh! IFA’s not allowed to earn too much yet the whole of other society can earn what they like.

    Also what seems to eb overlooked, IFAs should charge more to pay for the F-Pack fees, compo fees etc which are going up and up and up……………

  30. @John Blackmore | 3 Jul 2011 10:15 am 4th July 2011 at 8:35 pm

    @John Blackmore | 3 Jul 2011 10:15 am

    No justification for such charges –

    Ever heard of Danger Money, a term used where extra money is paid to compensate for the risks involved in certain dangerous jobs Tell me John what price should we charge to be subjected to:

    Retrospective redefinitions of regulatory requirements?

    To have todays rules and standards imposed on a product sold yesterday?

    To have some retrospective reconstruction of regulatory requirements?

    To have a regulator act with hindsight who inverts the burden of proof, which would otherwise apply?

    And all of this without the Statute of Limitations or Longstop?

    £150K fines with rights of appeal?

    Most of us stay in this industry because we have no choice. However, give the next generation a choice and you’ll have no industry left unless the remuneration compesates for the loss of these rights.

  31. Decide what you want to earn each year. Divide it by the number of hours you work, and charge this amount to clients. They will either buy it, or not.


  32. John Blackmore 5th July 2011 at 12:03 pm

    @ what price should we charge to be subjected to:

    The problems that you raise mean that you would like to charge more. Unfortunately the higher charges, largely created as a result of FSA activity, will provide poor value for the client. You are not happy paying for all the overgulation required by the FSA ? so why do you think that clients will be happy to pay more ?

    Sorry but the only solutions that I can see are 1) move up to the complex high net worth world 2)
    Go Tied 3) leave.

    It is no good trying to “advise” on relatively simple issues and expect to get paid double the going rate of recent years.

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