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Seconds out for hourly fees

Lee Jones reports that a debate is raging over fee-charging methods after an emerging trend in the legal sector that has seen solicitors forced to switch from their traditional ways

Many financial advisers are trying to decide how they will charge fees while lawyers, infamous for their fees, are having to change their remuneration models.

A recent report by law firm Eversheds says: “Fees are set for a long-term overall decline or stasis” as legal clients demand more for their money and it is the hourly rate, so synonymous with the legal profession, that is dying out.

Eversheds found that 79 per cent of practitioners thought hourly rates were “almost dead”, with clients demanding “value billing” that reflected results rather than workload.

Eversheds partner Kevin Doolan, who specialises in lawyer remuneration, says the days of clients walking into a solicitor’s office unaware of the final cost are over.

“Previously, there was an excess of demand over supply for lawyers but now lawyers have to fix rates because the client needs to have a good idea of the fee in the beginning or they will go elsewhere. Not knowing if the service is going to cost £200 or £2,000 makes people uncomfortable.”

Doolan says this has meant lawyers are now offering fixed costs or a range of costs depending on the client and the job to be competitive.
Does this mean that IFAs should be shying away from an hourly rate?

Affluent Financial Planning managing director Carl Melvin says: “I fundamentally disagree with an hourly rate. Clients have no idea what the cost will be.”

Melvin has been charging fees for more than a decade and has several issues with an hourly fee. “From a consumer point of view, I think it is an unattractive barrier but I am also against it from a philosophical view – the longer you take the longer you charge, so why have efficient systems? Just throw out the IT, pull out a typewriter and charge 10 times as much.”

Financial Escape director Phil Castle agrees that hourly rates are not attractive. He says he has been charging fees since the mid-1990s and says his clients were not interested in being charged by the hour.

He says: “I use a fixed rate or a fee based on the percentage of the assets because people want to know the price up-front. I did try and sell my services on an hourly basis when I first began but simply people were not interested however hard I tried.”

Castle says he tried several structures before he found one that allowed him to get sufficient capital. “My method is not the best solution per se, it is just something we have got to that works for our clients.”

Yellowtail Financial Planning managing director Dennis Hall also recently said he had to try numerous fee structures. He said it took his IFA five years to make a profit from a fee-based model.

Speaking at the launch of the latest Aifa report on the RDR, he said: “I have had to revise the charging structure four times and every time I have had to raise my charges.”

Hall said he did not take a salary for a year while he experimented with a system that worked for his clients and his business.

He said: “The financial planning aspects of advice, which most firms do not charge for in the hope that the client will buy a product, must become chargeable.”

Doolan says the legal industry is now tending towards what it calls “value billing” where the results, rather than the workload are remunerated.

He says: “Now it gives the lawyer’s client the chance to talk about how much they are going to pay and what they are going to get for their money.

’It does not mean a lawyer now has to do £20,000 of work for £5,000. It has just meant that lawyers now have to have an intelligent conversation with the client with regard to the scope of the job’

“This has not been a problem for the profession and it does not mean a lawyer now has to do £20,000 of work for £5,000. It has just meant that lawyers now have to have an intelligent conversation with the client with regard to the scope of the job.”

Melvin says IFAs must do just this in an attempt to be able to move to the new model and make the financial planning chargeable.

He says by offering a range of fees, from an engagement fee to an implementation fee based on the assets, to an annual retainer and an asset-based wealth management fee you can aim your business at your client and make sure they get what they want out of the service.

Doolan says: “The key is to set the limits of the service. We tell people that they can offer a Rolls-Royce service or they can offer a Mini Cooper service and the client can get what they pay for. The key is to make sure the client is in control.”

The Ideas Lab director Roderic Rennison agrees an IFA firm must set the parameters of its service to ensure a profit but argues that setting an hourly rate based on the business’s capital needs should be a part of an IFA’s fee structure in order to avoid losses.

He says: “In a good client agreement, you do have clauses that allow for overrun when circumstances beyond your control or your client’s decision causes you to do more work, it is what we call scope creep. It is because of this you need to establish an hourly rate to reference that creep back. Rather than take a loss, you should be able to go back to your client during the process, explain why it is going to cost more and base that on an hourly rate.”

Rennison says the argument for or against using an hourly rate goes to the heart of charging for advice. He says: “I do not see the point of hiding what you perceive to be your hourly rate because to hide it is to say you are not prepared to stand behind it. We always say you should have confidence in what you deliver and what it costs to deliver that and the client should be happy with that.”

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