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