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Rob Reid: The difference between advice and transaction

Alan Lakey’s recent admission over the practicalities of transition is well timed as it demonstrated that moving to a more explicit charging structure requires preparation.

The comments of Nick Bamford and Ian Head were well made but I think missed a vital aspect of the transition and that is for the adviser to be convinced of the effectiveness of adviser-charging for all concerned.

As Alan Lakey subsequently commented, his issue came about as the clients were not clear exactly what they wanted to do. Does this not underline the difference between advice and transaction?

From a personal perspective, most of my new clients are unclear of what they should do and they seek direction/ guidance in my experience. It is those clients who are in that position that stay with us for the long term.

One party which is not helping with the transition is the Government as both this and the previous one do not seem to recognise the value of advice. I say the Government but I mean the civil service, which is the guiding continuum in this regard.

It is not just ironic it is grossly unfair, for those qualified at the higher level (level six – I know level four is RDR but, let’s be sensible, we cannot make the case for level four alongside other professions). This is where practising certificates would have value and not as at present where they are seen at worst as guarantee to an income flow for the bodies that offer them.

To get to this stage, we need a simplified advice option to sit alongside full advice. The Money Advice Service will, I hope, make it clear why having a dialogue with a qualified individual would help but some Government promotion of this would be a good idea.

Advice and its value are like transparency – they need to be put firmly in context. Telling people the level of charges is not as helpful as showing them the impact on their benefits. The same is true of advice, we need to get across the message of value. I am reassured by the FSA bringing execution-only into the transparency requirements. The recent news that, in addition to rebates, some also made money on foreign exchange simply demonstrated how essential transparency applying to all distributors is if we are to provide the information to enable a sensible discussion over the costs involved in execution-only.

Communication methods and content are key to a successful transition and, like anything new, guidance and practice are extremely helpful. As a workshop immediately before the PFS conference this November, Roderic Rennison and myself are tackling what we see as a major issue when making the transition. For details see

Just as moving from DB to DC moves the risk from employer to employee, the introduction of the RDR moves the risk of all work and no revenue to a more equitable position but to get there we need to get the message across, hence my unashamed plug for our November workshop.

Alan Lakey was right to start the process as early as possible; I suggest we all should be testing ideas and approaches now. Start with individuals you have pursued for some time, we all have them. After all if the new approach fails, what have you really lost? Then move on to current prospects and at each review raise the issue with current clients.

Robert Reid is managing director of Syndaxi Chartered Financial Planners


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There are 18 comments at the moment, we would love to hear your opinion too.

  1. I think the bottom line in all this is that the public need to be educated to understand that commission-based advice is NOT a no-cost option and, until that message is clearly and widely understood, a proportion of the general public will see fees as an additional cost that won’t be incurred if they use instead a commission-only intermediary.

    In fact, the banks and building societies commonly and actively perpetuate this very myth, by telling potential customers that if they go instead to an IFA they’ll be charged a fee, probably a large one. What they quite deliberately omit telling such clients is that in return for a fee they’ll get advice as opposed to just a product recommendation (and often a recommendation just to one product) and that IFA’s commonly take far less commission that bank and building society intermediaries.

    Given that CAR is (allegedly) going to apply to the banks and building societies just as much as to all other intermediary channels, one might think that such misrepresentation of the facts will become a thing of the past, but I don’t think it will. The banks will just sell CAR as a cost-built-into-the-product substitute for commission.

    As I see it (and I may be wrong), the only practical solution to this is for the FSA to stipulate, as a matter of standard operating practice to which ALL intermediaries must adhere, that not less than, say, a third of the total intermediary remuneration proposed must be charged to the client as a report fee BEFORE the presentation of any recommendations, let alone any product brochures or application forms.

    Anything less will not address the perennial problem of a tilted playing field. Comments anyone?

  2. Thanks for a helpful article. As other IFAs point out, RDR does not change the way in which many advisers charge as the adviser charge model allows for remuneration to come out of the product as it does now. The loss of uplifted allocation models is hardly a bad thing, and the FSA’s wish that the remuneration should to a fair degree reflect the work carried out is also pretty reasonable. The key thing is to be able to explain to a client where all the money goes in giving advice and running and IFA practice. We are all so close to these issues that it is easy to assume that clients understand far more than they do about the world we have to deal with in working for them. Once these factors are explained, and the client understands that the ‘face time’ is only a very small part of what has to be done at the point of giving advice and providing the ongoing service, things get easier. Most people are reasonable once things are explained to them, but taking the ‘because we’re worth it’ approach is a recipe for disaster.

    We all know this can be a tough job, and there is no shame in educating clients as to how we work. It is usually apparent that they totally underestimated the challenges and costs we all face.

  3. Terence P.O'Halloran 9th September 2011 at 1:23 pm

    For the first time I have had a £1 million investor, in Lincolnshire (not a common occurance), ask for my advice and then refuse to pay our retainer of £65 per month to have a report completed before any investment decisions were taken!

    Ordinarily she would have immediately been on our Gold service rate of £237 PER MONTH but she is married to an existing client.

    She took the whole lot to Natwest Bank “because the bank’s advice was free and they only had a 5% deduction at the point of investment”.

    So much for education and doing the job right. Her salary is over £80,000 per year with no tax planning.

    Theories are great Rob, living in the real world is a little different.

  4. Terence

    Only 5%? They were working cheap that day – see, RDR works, the Banks are running scared. Seriously though you have our collective sympathy, start drinking early today.

  5. I think Terrence has hit the nail on the head. It is the fact that the prospective client is demostrating that she prefered to know the conclusion before she comitted to paying any fees. In other words she wasn’t prepared to pay anything up front for advice and was prepared to pay more as a bundled fee for advice & implementation rather than to pay for advice that she wasnt, at that point, sure she would take up. I guess this is hardly surprising for inexperienced investors because what we do is so intangible.

    The problem, as we all know of course, is that the advice bit is what takes most of our time and expertise and so it is expensive and if our charging model is not to invoice prospects who do not proceed then a cross subsidy will be nesessary from the other clients.

    Terences & Alan’s recent experiences demonstrate not only that we need to start practicing our “new story” to prospects early if we are to perfect it in time but also that we need to think carefully about whether our charging model will be bundled or unbundled (or perhaps we can offer the client a choice with the bundled version being more expensive to reflect the cross subsidy)?

  6. Terence,

    We all know fools & their money are soon parted.

    All this episode confirms once again is that wealth is no reliable indicator of wisdom.

    The only result of incidents like this that disappoint me is that if and when these folks discover their error, to save face they will almost certainly never return to you admitting they were wrong and then benefit from your service.

    We can only help those who perceive the value of what we do.



  7. Leaving aside the possibility that the client described by Terence is a complete “fool” (horrible thing to suggest but I cannot think of a better word for someone who would pay £50,000 in this day and age to invest £1m!!) what was it Terence didn’t do to convince them that his proposition was better than NatWest?

    Why do our clients pay our advice fees?

    • They value impartiality and independence, independence of advice from product solution (the two are very different)

    • It is a “low-cost” way of testing the quality of what we deliver in terms of advice and service

    • It is an opportunity for them to work out if we are the right people to have a longer-term relationship with

    • It empowers (buzz word!!) them if they want to, to go off and implement for themselves, although most then go on to implement a solution through us

    • Our advice fee tells them that we know what we do for them is valuable

    • Through our engagement process and a detailed engagement letter they can link what we do to what price we charge and thus determine value (much more important than price)

    If they say “no” then that is my fault not theirs I clearly didn’t give them a compelling reason to say “yes”

    I agree with Elaine Birch proposition needs to be practiced but not in front of prospective clients that is what the training room is for.

    It does work in the real world as well as in theory it just requires a lot of effort

  8. I know I should have been out seeing clients last night but I had a night off. I was channel hopping and turned over to see a comparison of the cost of pop corn in various Cinemas. Keeping it short and to the point it was apparent cinemas were charging approx £5 per portion (cost approx 40p). They were charging low entrance fees and transferring running costs to those willing to pay for food and drink.
    Isn’t this unfair making a few help reduce the costs to the others?
    But it comes down to choice buy or not to buy as long as the client is informed of the costs and the affect of charges etc who’s to say what is fair or not.
    Fees are just a way for the tax man to raise funds by adding VAT. Clients again will loose out.

  9. New Client last week. First question: What do you charge ? Gave option of hourly or commission based, chose commission based. Enough said. RDR is C**P developed by people who live in the world of HNW and are completely out of touch with middle Britain.

  10. Possibility A: Client agrees to a fee and both parties are happy.

    Possibility B: Client will not agree to a fee but is happy to proceed on a commission basis. He does this and both parties are happy.

    Possibility C: Client indicates he will proceed on a commission basis but upon receiving the report decides he can obtain the plans cheaper by using a bucket shop.

    If we only proceed with clients who agree a fee we lose an indeterminate number of clients/potential clients.

    If we provide a report and the client fails to act or, worse still, acts via a bucket shop then we have worked for no reward.

    At the moment we do have cross-subsidies where the clients who transact business effectively pay for those that waste our time. Whilst some say this is unfair we need to accept that in every other business this principle applies.

    So, the question is, what is the way forward that allows us to deal with the overwhelming majority of potential clients without becoming a charity. If the RDR changes mean that a vast number of potential clients are disenfranchised then we need to accept that, once again, the imposition of regulation has served to create the very problem that it proposed to solve.

  11. @anonymous 3.03pm

    I can just picture the scene.

    New Client

    “What do you charge?”


    “A choice of an hourly rate of £150 per hour or the product provider can pay me commission and it won’t cost you anything”

    New Client

    “Well, in that case I will go the commision route

    Be foolish not to really

  12. @Alan Lakey

    There is another option post RDR.
    Adviser continues to bundle advice and implementation just like now. Agrees an adviser charge, let’s call it 3% plus 0.5% trail. Does the advice and presents it to the client. Adviser though only gets paid if the client says “yes” and buys a financial product. So nothing changes and under RDR that is pretty much the same as the commission based IFA of today. If clients and advisers are happy with that today they can be just as happy post RDR

  13. I haven’t yet read one single sensible article on the proposed commission ban. Not one article has addressed the central issue of the cost of product marketing, distribution and maintenance as a cost to the product provider. I used to manufacture exotic fruit cakes, and to get those cakes to the customers who would eventually eat them involved a cost for my firm which we offset against profit and tax. No one came along and said we will get your cakes to the cake-eaters, and you won’t need to pay us anything for that service. What’s more we will pay you the same price as the customer could buy them direct from you, so your profits will increase. We will make our money by recommending your cakes and then charging customers more for them. They have to pay us for our recommendation!

  14. Read your article, Rob – don’t understand a word of it. You seem very confused. What Alan Lakey said makes a lot more sense – more real world.

  15. Terence
    Gobsmacked at your client’s stupidity. For a client who obviously holds down a decent job requiring application of intellect, her failure to understand how our profession operates and what is in her interests is indicative of the post RDR world.
    Not a pleasant prospect.

  16. Why not let the CLIENT have the CHOICE, fee or commission both fully disclosed.

  17. Fees or Commission?

    I think that an important distincion is being lost in translation:

    1. Fees are charged to CLIENTS for a service and advice.

    2. Commission is charged to CUSTOMERS for the sale of a product.

    The FSA do not seem to understand the difference, and insist on collectively calling everyone who buys financial advice a CUSTOMER. This seems NOT to be consistent with RDR.

  18. If an IFA cannot convince clients that the value of his or her advice will at least equal the cost of that advice he or she does not have a viable business, and does not deserve to survive.

    I read people protesting that the clients wouldn’t pay a fee. Maybe the clients simply had no confidence in what they were being told and used the fee objection as the quickest way to get out of the door.

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