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Robert Reid: Most advisers have not moved far enough on charging

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As a young broker consultant I was enrolled on a training course where the trainer mentioned a book written by Frank Bettger called, How I Raised Myself From Failure to Success at Selling. Provided your ego allowed for a major change in your approach, then this was a book that had the possibility of major impact.

I say if your ego allowed it as, currently, I see evidence of failure being paraded as success and far too many people being in denial. We can all improve and to reject change is to accept the inevitable slide into mediocrity.

My evidence for the above statement comes in the form of responses to recent research into adviser charging that does not align with the adviser charging data held by providers, where 3 per cent upfront plus 0.5 per cent trail continues its reign supreme. 

When more than 50 per cent of pre-RDR revenue came from setting up investments on 3 per cent initial commission or more, moving to 1 per cent or in some cases zero will have a major impact on any business.

The recent research I refer to suggested that for sums of £100,000 or more invested many advisers significantly reduce the intial charge. This research had a small sample of less than 80 adviser firms but when I posed the same question to over 1,500 advisers in a recent road show 95-98 per cent were still using 3 per cent initial + 0.5 per cent trail.

Of greater concern was the number of those attending who saw no difference between commission and adviser charging. They admitted that this impression was also conveyed to clients. So is it any wonder why the FCA has disclosure issues post-RDR?

Please also keep in mind that as recently as two years ago we found, during some detailed research; that the most common level of investment handled by IFAs was £50,000 or less; so   this reduction in initial charge could be best described as imagined and not real.

There is no doubt in my mind that adviser charging will not last. After all, it wrecks the tax-efficiency of investment bonds or Isas and it just cannot be used when deploying a discounted gift plan unless the reduction of the discount and the gift itself is not seen as important. Good luck with convincing compliance of that.

The fact that the common initial charge is six times the on-going is just not tenable nor is the 0.5 per cent trail enough in many cases to cover the cost of an annual review, especially if the investment is in capped drawdown where on-going suitability means significant costs post set up.

Where withdrawals are sought from an investment bond then a 0.5 per cent trail equates to a 10 per cent reduction in income that’s not an easy client observation to ignore.

We need to move to a modular charging structure if we are to professionalise the sector and grow our businesses in a safe but successful way.

People may well baulk at the costs when they are fully exposed but that simply provides the opportunity for discussion. We need to grasp the opportunity and ensure the entire sector has that honest discussion on costs be they restricted or independent.

Bettger always stressed that when put on the spot people would first provide a plausible reason and not the real reason for action/inaction. When pressed they would then reveal the real reason; he used the phrase “that was interesting now what was the real reason?”

The current situation is similar but more serious. If we are not honest with ourselves, then we cannot move forward.

Robert Reid is managing director of Syndaxi Chartered Financial Planning

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Robert, if the IFA business hasn’t moved on charging , it’d suggest that little else had changed in their business model . And that’s probably not a good place to be.

  2. read a sales book many years ago which said that a salesman should always wear a hat and only smoke when the client offered you one of theirs.

    times change but people do not.

    everyone has an angle.

  3. Commission, fee, pay,cost, renewal, consideration.
    It is all fudge and basically the same thing.
    The total cost is £x paid by any of the above.
    Give the CLIENT the CHOICE, one size does not fit all

  4. What charging model is sustainable then.

    Please tell us o wise one.

    Do Raymond James tell you what to charge or do you decide.

  5. David Stoddart APFS 6th September 2013 at 8:57 am

    I think that we are on a journey with fees. I dont agree with the 1% or 0.5% trail fee, however, that is not to say I dont charge 0.5%. Where I want to be is a set fee for the review. Like you said 0.5% on a typical investment does not cover your fee for an annual review however it may mean that the client only gets a review every three years or they pay you more to have an annual review. I am constantly having the debate about how much extra time does it take to review £1,000,000 as opposed to £500,000 or £100,000. I would say not a lot. Fixed fees based on how much time it will take me to do the review I believe is eventually where I will get to. Gone will be the days of getting paid for not doing anything or little. Some Advisers will disagree however their clients will be at threat from others when it starts to get competitive on charges.

  6. Perhaps the reason so many intermediaries continue to use 3% + a half is that, as a benchmark, it’s worked entirely satisfactorily for decades, for them and for their clients, and they simply see no particular need to “move on”.

    If an investor considers 3% of £50,000 (£1,500) to be unreasonable (though most evidently don’t), they can always negotiate or, if they think they can get the same package of advice and implementation elsewhere for less, they’re entirely at liberty to do so. Why this endless obsession on the part of the regulator with trying to reinvent the wheel, when the existing one, by and large, still works just fine?

    I’d thought the idea of CAR was, primarily, to stamp out bank sales people flogging bonds on 7% with nothing thereafter to pay for ongoing service and reviews. But, as usual, the FSA’s real agenda appears to go far beyond what’s actually needed. So, when people write things such as The RDR is here so just get with it and move on, my response is Why doesn’t the cursed regulator accept that enough is enough and itself move on to matters of greater importance?

  7. Raymond James have no input in my charging model other than to confirm it is compliant. We have been fee based since 1998 and have an unbundled proposition if Anonymous 10:20 cares to email I will happily point him an appropriate direction

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