Historically, many advisers’ earnings came only at the end of a project in the form of commission for arranging a financial product. The actual advice element naturally comes before that and so, in common with most of my peers, I have often given my advice “for free” in the hope or expectation that the financial product – and the commission – would follow.
The RDR in 2013 replaced commission with fees but it did not necessarily mean a change in approach: often, commission at completion just became implementation or success fees.
Despite being viewed by some as more professional, hourly or fixed rate fees are still the exception. Even where they have traditionally been used, there is a recognition of the possible flaws and so I was not too surprised when a solicitor I was speaking to recently explained that they are actually moving away from hourly rates to an implementation model.
In simple terms, they will effectively be giving their advice away for free in the hope of arranging a product although in their case it might be a will or a trust rather than an Isa or a pension.
The implementation or success fee model, then, clearly still has a place – and I do not have an issue giving my advice away in advance of, hopefully, undertaking a paid action for a client.
On the other hand, a speaker at a recent conference made a point that really struck a chord – it is not just our advice and expertise we are giving away, but our time. My time, even more than my advice, is highly valuable to me. This is time I could be spending with my friends and family rather than on unprofitable work for clients.
I therefore now agree minimum fees with clients, so that even if there is little or no implementation work, I am still paid for my time. In addition, some work which I would have undertaken for nothing pre-RDR I now charge for. Some clients have declined to pay the new fees, freeing up time to spend on those clients that do value my time.
At the same conference, I met a new IFA working all hours, including weekends and nights focused primarily on mortgages and life cover. I felt he was making a mistake by giving his advice and time away for free by relying just on commission and procuration fees.
I suggested he take heed of the old idea of doubling your charges and losing half your clients. By charging his clients a realistic minimum fee, I suspected that not only would his earnings increase but he would be working fewer hours and with a much better work/life balance.
I recently spoke with him again and he thanked me for my advice. He has now introduced both an initial fee and a completion fee for mortgages although he plans to switch to an offer fee. One or two people had told him they would not pay any fees but the majority were more than happy and his cash flow position had improved immensely. Perhaps even more importantly, he was back in control of his most valuable asset: his own time.
Scott Gallacher is director of Rowley Turton