Julian Stevens has invited advisers to provide their views on customer-agreed remuneration following the poor experience he had with a prospective client who wanted to renegotiate his “fee”. Julian’s letter actually tells us very little about CAR but an awful lot about the need to articulate value rather than price to a client.
We have operated a CAR approach to pricing for the best part of three years and have concluded that it is brilliant both for the client and ourselves. This is because we have created an environment where the emphasis is on what we do for the client – the added value we bring – rather than what it costs us to do it.
By the way, CAR was never designed to “broadly align deductions, be these commission or explicit flat sums or percentages, from the product with the amounts that would otherwise be chargeable as fees” and to describe it that way is both to demean the payment of fees for advice and to hide the fact that advice has to be paid for by replacing commission levels determined by the product provider with commission determined by the adviser.
Our firm refers to this as “impure CAR”, particularly where it is paid for by an annual management charge which looks strikingly like a capital unit-type charge. I am assuming, by the way, that we all agree that advice has to be paid for.
CAR is simply a method of telling the client explicitly that they have to pay for professional advice and implementation services and giving them a choice about how it is paid for. Pure CAR is where the investment amount is reduced by the amount of the agreed fee – a flat monetary amount or percentage – with the balance then invested for the client.
However, leaving aside what we think CAR should or should not be, what strikes me about Julian’s experience is that price is irrelevant and value is everything. The cost that I or any other IFA incurs in running our business is of little importance to the client, other than ensuring that our business can deliver whatever it is that we have agreed to do for that client.
I can almost imagine the client’s response to Julian’s letter listing the costs he incurs as a result of being an authorised and regulated business as: “Not my problem, mate.” In fact, the client might be thinking: “Well, if you ran your business in a more efficient manner, I would have to pay less.”
Perhaps the focus of his letter should have been on adding value to the financial life of his client. The client is not paying to cover Julian’s costs, the client is paying to get really good advice and implementation services and those need to be explained to him. Explain to him that:
I note that Julian has recommended the pension plan and now the client is trying to negotiate on price. That strikes me as being the wrong way round. We have overcome this problem by unbundling advice from implementation. We would not get to the point of recommending a product without having an engagement letter in place signed by the client and agreeing to pay our advice fee. Much of our advice does not result in a product at all, it is advice only.
Advice is where we add most value, so why give it away for “free”? Of course, it is never free because even advisers who do not charge explicitly for advice recover costs from the commission they receive from those clients who do buy a plan, so someone always pays.
By the way, the cross-subsidy that exists in such businesses may well come under pressure in a regulatory world focused on treating customers fairly.
Julian has no doubt delivered a first-class piece of advice but now runs the risk of not being paid or possibly being underpaid. I cannot see how that can be commercially sensible. CAR and the retail distribution review provide us with a real opportunity to rethink our business model, proposition and pricing approach.