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