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Robert Reid: Losing the loss leaders

Business owners must accept that they cannot be everywhere all the time.


When The Ideas Lab was researching charging methods pre-RDR, we were surprised to learn only a tiny proportion of firms had ever used time recording in order to determine how long it took to complete various tasks in the advice process.

All the recent discussion surrounding guidance has underlined just how important it is for us to be more circumspect in who we take on as clients and charging what the market will bear instead of what it costs to complete the task.

I recently wrote a piece that looked at the problems with contingent charging (where nothing is charged up front or, just as bad, where a minimal or insufficient fee is requested) and asked whether its days are numbered.

Charging too little is never smart. Indeed, in the words of Barratt Homes founder Lawrie Barratt “loss leaders inevitably lead to a loss”. Ensuring all clients are profit centres is a vital step in determining who you should keep on your books or drop. As I have said before, pro bono is fine if you know that is what is happening. Finding out when it is too late is not clever.

If we go back to the FSA’s CP 121 before the RDR, the defining point planned to signify independence was upfront fees. Then it was deferred to see if the “Menu” worked, which it did not, and so we ended up with the RDR. Adviser charging has been little more than a label swap. Admittedly, firms have thought more about their proposition but how that then links to investment committees and due diligence is anyone’s guess. In many cases there are no intentional linkages.

Simply listing all that you do for a client is a great place to start, as you determine what should be charged in comparison with what is being charged at present. Issue a version of this list to clients and ask them to vote on their preferred elements of service: often they will see existing services as new, and new as existing. After all, if they do not want a service, why should they pay for it? Service options need some flex. If that remains the evolution process, things can only get better.

As the pressure inevitably mounts on charges there is no doubt that cost reduction will be the only way to hold margins at their current level. For many, that will mean outsourcing and making sure that the processes utilised either add value in the eyes of the client or reduce risk for the advisory firm itself. If tasks fail to fall into either category then they can fall away with the resulting savings.

As the new capital adequacy rules take effect I fully expect the use of outsourcing to grow exponentially. The other major change will be the recruitment of a different type of back office staff, with client management taking a central role.

Now, it is easy to focus on everyone else and forget that even principals need to review their role and their contribution to the firm. All too often principals do not delegate enough or indeed at all. Delegation needs thought for it to work well and, when it does, a business can be transformed with much less pain.

Sometimes the best evolution is for advisers to recognise they are not best employed running the business but are far better focusing on advising clients. Recognising limitations is the best starting point from which to increase the firm’s profitability. After all, does a title really matter if you own a significant part of the firm? I think not. Successful firms have everyone playing to their strengths.

Robert Reid is a director at The Ideas Lab 



Alan Lakey: Is the ABI hindering plan design?

Back in 1999 the Association of British Insurers instigated a critical illness working party charged with the task of applying standard generic terms and injecting greater clarity into plans. Model wordings were applied to 19 conditions in total – seven core conditions (the main conditions covered by at least 95 per cent of all plans) […]

Reforming India: just the beginning

By Kunal Desai, Neptune India Fund

As global investors continue to scour emerging markets through the lens of reform potential, India shines bright. Indeed, we think it can sparkle even brighter. We anticipate India’s self-imposed 10-year ‘policy holiday’ to turn into one of the most pro-growth and pro-investment policy calendars seen in Asia in years. The Indian electorate has engineered a historic verdict. We now have the strongest Indian government since 1984, with the pro-market Bharatiya Janata Party (BJP) achieving an absolute majority for the first time in the party’s history.


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There are 13 comments at the moment, we would love to hear your opinion too.

  1. I think this is the first time I have disagreed with Robert.
    There are two great issues with charging on the clock:
    1. How does the client know you are working at optimum speed? If every telephone call or e-mail is charged for the client could well think twice before contacting you. We are in a service industry and providing a service doesn’t necessarily mean charging for every 15 minutes.
    2. The client will never know exactly what he/she is letting themselves in for as far as cost is concerned. By all means estimate up front how long the job will take and then advise that the bill for xyz will be £123.Then at least the customer knows where they stand. Garages have at long last understood this and you now know in advance how much a service will cost you. If any unforeseen event elongates the advice time then I guess that’s just tough. More often than not this is as a result of provider inefficiency – so the adviser should bill them – not the client.
    Anyway for established client relationships the occasional ‘free gift’ does no harm at all and rather demonstrates that not all of us conforms to the stereotype.

  2. Take The High Road 2nd March 2015 at 5:13 pm

    @ Harry,

    This was a good article, written to provoke thought so I’m not sure exactly why you feel you need to admit to being in disagreement.

    Maybe I have read what Robert has said differently but I think the biggest point made is that “service options need some flex”

    …..above all however, it is the regulator who needs to take the biggest note on this and stop meddling with things it doesn’t understand, such as the commercial choices each business needs to make for themselves!!

  3. @ Take

    Point taken.

  4. Julian Stevens 3rd March 2015 at 9:03 am

    As ever with the caveat that membership of a network will never be right for everyone, the facility to delegate many tasks and duties to a third party (provided of course you can strike a mutually acceptable deal for so doing) has (IMHO) a lot going for it. It frees up time to concentrate on running your business and advising clients. A while ago I spoke to a former network member who’d decided he wanted to go it alone and his words have stayed in my mind ever since: It’s no cheaper.

    As for fees, I have since 2001 insisted on at least a nominal sum for my pre-sale work (typically a couple of hundred quid for a reasonably straightforward investment package) and for documenting my recommendations. Those who refuse to pay even a contribution towards the cost of that work should be regarded as almost certain time wasters and, on the very few occasions on which I have waived this rule, that is exactly what they’ve turned out to be. Why should I give of my time and expertise for nothing, with the prospect free to walk away if s/he can’t be bothered to make the effort to engage seriously with the best advice I’m able to formulate? I would suggest that not charging a fee is to sell ourselves cheap and that these “free pension reviews” being offered by numerous firms are nothing but a pitch to sell an alternative product irrespective, in many instances, of whether a new/alternative product is, when all factors are considered, actually appropriate. It is for this reason that I support the FCA’s concerns about contingent charging.

  5. Take The High Road 3rd March 2015 at 12:29 pm

    Well said Julian.

    ……but sadly it would seem we are the few who take this route. The vast majority of advisers are(if you believe the stats) still work on contingent charging which cannot be healthy for any profession.

    Some advises would no doubt argue that they can always sniff out the time wasters but why take the risk?. My view is simple; present your charges for the work you will do – be it an overview of their current plans(a Discovery) and/or a larger fee for a ‘report and recommendation’ followed by smaller flat/percentage based implementation cost for any new investments and any on-going review work needed.

    There is no rocket science needed for this. An estimate of the time and/or cost taken to complete a given task is fine and everything else will naturally follow if the client values your work and advice. But even if they don’t proceed to finally implement your recommendations, at least you will have been paid for what you have done so far!!

  6. @Julian

    “A while ago I spoke to a former network member who’d decided he wanted to go it alone and his words have stayed in my mind ever since: It’s no cheaper.”

    I don’t know the business model this person operates or his skill set in running a business. I can only speak for myself. Having run my business as a sole trader for 25 years and having made a profit in every one of those years I can categorically state that my compliance charges have been around half (if not significantly less on occasion) that those charged by a network. Moreover from what I have seen recently I am also pretty confident that my charges are about as competitive as are available in the market. I have checked the figures on several occasions with the same outcome. You are paying for a whole load of other stuff that may not be required by those who are prepared to do the work themselves.

    Even if the costs were equivalent it would have been worth NOT being a network member. I am well aware of the spotty youths who impose their own interpretation of what is and is not compliant. I also know that members often have issues with client ownership. Using the term independence in the literal rather than the Financial Services sense – you are without doubt NOT independent if you are in a network. Some of us really don’t need to be nannied. Your compliance overhead is much more of a fixed amount than the imposts that a directly authorized adviser has to find.

  7. Contingent charging is extremely common in the corporate finance department, including those within accountancy and legal practices, where work is usually undertaken ahead of a transaction taking place. If it does great and there is usually a premium on the fee to reflect the risk taken. How is that any different?

  8. Harry Katz ~ of course your direct compliance costs will have been less by having been DA but the issue is the costs, in terms of time and effort (and headaches), of all the things that a network would have taken care of for you that you otherwise had to do yourself. What you pay for is the delegation of all those overheads. The point my former network colleague was making is that by being DA, in preference to being a member of a network, his OVERALL compliance costs are no less. He went DA because he wanted to row his own boat (his choice, which is fine) but, as a result, he hasn’t saved any money.

    A classic example of the headaches of being DA was posted by someone a couple of weeks back who cited the requirement of his PI insurers that he send them copies of his files for every single pension fund transfer he’s EVER done. Or another guy who’d been rejected by no less than 16 PI insurers because he’d made ONE claim during the previous year. Then there are the GABRIEL returns which, as so many have reported, are a half yearly (now annual) resoundingly irksome trial, not to mention having to engage periodically directly with the regulator (and how many people find THAT enjoyable?).

    A few years back I became interested in the possible attractions of life settlement funds. They sounded like they might be a good alternative asset class, so I phoned my network to ask them their opinion and they told me, quite rightly as it turned out, to steer well clear of them. Thank goodness they were on hand to do so, thereby saving me either a lot of due diligence to arrive at the same conclusion for myself or the dire consequences of having recommended them because, as far as I could tell, they looked okay ~ which, to a lot of other intermediaries, they evidently did.

    But, as I’ve been at pains to emphasise, it’s not my opinion that all sole traders and small firms should join a network. For some, DA suits them better than network membership whilst for others, the latter is better.

  9. @Julian

    As I said some of us can cross the road without having our hand held. And we are prepared to make the effort. As for Gabriel – I only found it a bit of a trial the first couple of times, thereafter my Management Accounts were adjusted to provide the information and the return took about 90 minutes.

    As for engaging with the Regulator – it is of course in the interests of the Network to ‘frighten the horses’. I have always found them most helpful and courteous. My last interface was in the application to relinquish my permissions. They directed me to the relevant part of the website and told be exactly what was required. They advised that is could take up to 6 months to process the application.

    In the event the application on the website took about 20 minutes and the whole process was finalised in 26 days. (They were probably delighted to be shot of me!)

    Dealing directly with the Regulator is not by any means an unpleasant experience and at least you know exactly what is required – not someone’s second hand interpretation which too often is tainted by their own agenda.

  10. Julian Stevens 4th March 2015 at 4:48 pm

    Harry ~ If dealing with the FCA is such a heart-warming, straightforward and pleasurable experience, why are you forever bitching about them on forums such as this?

  11. Julian

    I don’t think you have been paying attention. I certainly do my fair share of criticising, but it is invariably about rules and process. To the best of my recollection I have never complained about my direct dealings with the Regulator. As I have said I have always found them courteous and helpful. No doubt as a network member you have to rely on hearsay.

  12. No I don’t have to rely on hearsay. Apart from what I read here and on other forums, I have several friends who are DA and they report decidedly varying experiences of dealing directly with the FCA. A classic example (reported on one of the forums) is of somebody who was trying to complete their GABRIEL return and, having failed to be able to make sense of the guidance notes, phoned the FCA for assistance, only to be told Look at the guidance notes. That’s really helpful isn’t it?

  13. Julian

    Maybe they just liked me better! Or perhaps I have been lucky. Or perhaps my questions were not completely stupid. Or perhaps I wasn’t belligerent or confrontational.

    Who knows.

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