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Scott Gallacher: Stop obsessing over charges

Agreeing with the client beforehand is more important than how we charge as advisers

Rowley Turton director Scott Gallacher
With the RDR still fresh in our minds, we are seemingly headed for yet more upheaval with the current fixation on fees.

Contingent, percentage-based and provider facilitated, fees have largely taken the place of commission, with some arguing that this is commission in all but name.

In the case of one large vertically integrated firm, where the cost of advice is not deducted separately and the client apparently has no option of declining to pay the advice cost, it is difficult to argue this point. But in most other cases, where the cost of advice is agreed between the client and adviser, and clearly deducted separately, I do not see the issue.

Some question how we advisers can hope to be seen as fellow professionals when using contingent or percentage-based fees. Many insist fixed fees or hourly rates are the only way professionals should charge.

A standard accountancy charge for advising on and arranging a business sale is 3 per cent of the valuation, with an additional 10 per cent fee on anything over that valuation. Probate fees are also often based on the value of the estate. Consequently, percentage-based fees are not the sole preserve of financial advisers.

Other professionals are not above some questionable charging activities either, with a corporate lawyer explaining to me some examples of sharp practice they had seen.

For instance, some accountants would apparently ask you for your value of the business before they professionally valued it. This opened the door for the accountant to agree with your low valuation and – on that 3 per cent plus 10 per cent charging model – risked you paying 10 per cent on some of the fair value, rather than 3 per cent. So if you undervalued your business by £1m, this trick could result in you overpaying your accountant by £70,000.

The second trick involved corporate lawyers deliberately underquoting to win business sale work. But these low quotes were on the proviso the sale went through within six weeks and there were no unforeseen issues. Of course, business sales rarely go through this quickly and there are almost always unforeseen issues. Consequently, the final bill was often more than double that originally quoted and usually higher than other lawyers had quoted at outset.

Hourly rates are also not the perfect answer some claim they are. To save a deceased client’s family time and money at a difficult time, we provided their solicitor with all the relevant investment probate values. However, the solicitor ignored our letter and instead requested that same probate information again from the relevant investment companies. The only reason we could conclude for this was that they wanted to maintain their own fee income.

I have also seen people working on fixed fees come up with incredibly complicated tax arrangements but, when the fixed advice fee was taken into account, the key beneficiary of the exercise was the adviser.

Ultimately, we need to stop beating up ourselves and our peers over fees. The key, regardless of the charging method we use, is that both the client and adviser agree on it at outset, the client is fully aware what they are paying and that we add more value to them than we charge.

Scott Gallacher is director of Rowley Turton 

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. Spot on Scott..you are right on the money.

  2. I don’t think the isuues is how the fees are paid. I think the issue is that Life Company pension members are under the impression that their ‘advice’ is free.
    Of course, we know that no ‘advice’ is given and that the members have to decide themselves how risky their pension is, the diversification of assets by type and geography and how to research the assets so that their pension funds are not in the wrong risk level and assets as they retire.

    I have had no issue with Clients and fees since I placed them on our website and then asked prospective Clients to look at them before we meet up for the first time. Potential Clients will roughly know the value of ther invesments (Pensions/ISAs/Cash) and can work out roughly what it is likley to cost them before we meet. It seems to work.
    It seems that Clients want to know roughly the cost before engaging with an unknown adviser.

  3. Nicholas Pleasure 23rd June 2017 at 1:27 pm

    Agreed. We operate the ‘Radiohead’ fee structure…’no alarms and no surprises’.

    Agree a fee with the client at the outset and stick to it. Result; happy clients and no FCA concerns.

    Ultimately, if the client understands and agrees the fee, then there is nothing for the FCA to see here and they can spend their time worrying about people selling investments in teak forests to SIPP clients rather than obsessing over something which is basically just the reality of a commercial business.

  4. Robert Milligan 23rd June 2017 at 1:37 pm

    Basically, I agree with your comments, however, I do think a Max Fee for Basic Advice should be agreed, Intrinsic are showing “Up to £2000 for arranging a Mortgage” and 5% on initial Investments, this can not possible be allowed, I suppose it’s £3% for the Advisor and 2% for the extra Lines of Management and Company Car Park Spaces, if this is not a Bid & Offer spread then yes they have simply turned Commission in to Fees and the client is simply not any better off, The RDR simply has been two fingered!!

  5. Julian Stevens 23rd June 2017 at 1:51 pm

    A good article, Scott, though the primary generator of all the current froth about who charges what and by what mechanism may well be at least as much due to journalistic juicing up as due to the regulator having voiced concerns about a small sector of the advice community charging fees which appear, on the face of it, to be somewhat on the high side.

    We also have to consider that, anecdotally, quite a large proportion of the intermediary community still charges on exactly the same basis as they did pre-RDR.

    But, as you say, if it’s all disclosed to and agreed with the client, then surely there are more pressing issues on which the regulator ought to be focussing its attention?

  6. All good points and well presented.

    RDR did 2 things, adviser cost wise – remove the payment of the adviser from being influenced by providers (with current notably exceptions as alluded to above) and, in turn, this meant that the client needed to agree with the adviser as to their charges.

    This was a significant step and often seems to be overlooked (albeit there are creases in the legislation which can see consumers meeting the cost of commission when no advice is being given which outweighs the cost of fees but that’s another debate).

    As Scott suggests, client agreed remuneration can result in work being self defeating and therefore the FCA make clear that where a cost of advice occurs, there needs to be a likely benefit to the client despite this cost (forgive the paraphrasing).

    There is much made of charges but little is ever made of value… i.e. the net benefit clients receive both financially and in terms of adviser support.

    As a firm, we don’t have a one size fits all charging structure – we don’t do cash flow modelling where it’s not needed, we don’t do annual review meetings where it’s not needed (or the cost is prohibitive).

    For me, value is much more important than cost. What does the client want and need, what are they happy to pay and do the two align – how it’s ultimately paid is not as important and there are many situations where (as the case with commission being banned) there can be consumer detriment if legislation restricts choice.

  7. David Geale or R Percival …..prepared to comment
    I wouldn’t mind if A Bailey wants to chip in his two peneth worth

  8. …and even the President of the Supreme Court seems to agree

    https://ivorparkfinancial.wordpress.com/2013/10/30/you-heard-it-first-here/

  9. Good article, totally agree and have been saying so for years.
    The only issue is contingency fees especially concerning DB Transfers, which can easily be resolved by splitting the process in to two, research and guidance (including currently TVAC), followed by full advise and transaction.
    The regulator has made this clear enough, does not have a problem as long as it is clear and in £&P and agreed by all parties.
    Advisers have the issues, as some seem unable to accept not all wish to adopt their method of charging, which they believe is the only fair way. Its a shame as all have merit and all can be managed fairly, ethically and clearly explained.

  10. I completely agree with your points Scott. I don’t understand the obsession from the media about charges. The whole debate about percentage based charging versus fixed fees by some of our peers is nonsense. Most of the time it’s because they are promoting themselves for having a different model of charging and then criticising others for not doing the same.

    Whatever model your firm adopts is up to you. We cannot move forward as a profession if we are fighting amongst ourselves. This is the issue with our profession at the moment and I hope you all can see it too.

    We are all too ready to criticise our peers, whether it’s on charges, or restricted vs independent, or any other matter. If we can’t even trust our peers, a professional qualified adviser, to be doing the right thing for the clients, how can we expect the public to?

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