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Survival of the strategist

FP Advance explores fee options and outlines their pros and cons. Recommendations around customer agreed remuneration in the RDR will force advisers to face up to the question: ’What do I get for my money?’ as clients see clearly what they pay for access to advice

Brett Davidson
Brett Davidson, Chief executive FP Advance

No charging methodology is perfect and no approach works every time for all clients. We will look at fee options and outline the benefits and drawbacks.

Fee strategy 1: plan, implementation & review fee
In the advice process, there are three clear places where value is added to the client:

1: When the initial strategy or financial plan is presented to the client (telling them what to do)
2: At implementation (putting it into action)
3: At ongoing review meetings (keeping things on track)

Advisers that can explain their value clearly to clients can charge a premium price at each of these three stages. Let’s look at each individually.

Plan fees
After meeting with the client for the first time and doing the fact-finding, more and more advisers are charging a fee for analysing that information and presenting their recommendations to them. The better the job done in this phase, the higher the fee that can be charged.

For example, James Harvey who is featured as our case study for this article, charges around £2,500-£3,000 for the financial plan. His process
involves an in-depth and highly skilled first meeting process that really gets to the core of what people want to do with their lives. His financial planthen comes back and shows them how to achieve all the things they want, adding plenty of value, hence the premium price tag.

Other advisers charge much lower plan fees to simply weed out those buyers who are not so serious and to cover some of their up-front costs.

A third variation of this approach is to get a signed terms of business from the client agreeing a fee in the event that they don’t proceed to buy something or invest with the adviser. If the client does “buy”, the fee is waived or offset by the commission generated.

Once the client has signed off on the recommendations at the planning phase, the next step is to put it all into action

Implementation fees
Once the client has signed off on the recommendations at the planning phase, the next step is to put it all into action. This usually involves filling in forms and getting things lodged with investment managers, platform providers, insurance companies or all the above.

At this stage of the process, most advisers are still charging a percentage of assets to be invested for investment and pension work. For life insurance work, commission is still often taken although some advisers have moved to a flat fee charge for getting the life insurance in place.

Ongoing review fees
For advisers providing access to ongoing advice with an agreed number of review meetings per year, an ongoing review fee is charged.

This is often the trailing commission from a product or platform and varies between 0.5-1 per cent a year depending on how well the adviser understands the value they add and how well they can explain it.

Some advisers charge a flat fee for ongoing advice, particularly where there are no assets under management.

Others charge some form of retainer instead of, or in addition to, an asset based fee.

For example:

Plan/strategy fee: £1,000
Implementation fee: % of assets invested
Ongoing review fee: 0.5%-1% of assets under management
(AUM)
Or: Flat fee for clients with no AUM

Pros

  • Adviser is paid in three areas where he/she adds value
  • Relatively simple to explain and understand
  • Each discreet step in the advice process can be charged for one at a time, ensuring the adviser gets paid for each step and also allowing the client space to consider each step
  • Positions the business clearly as a fee-based service
  • If costed correctly, every job adds to the bottom line.
  • No work is done for free
  • Clients can easily benchmark value against cost
  • There is no product bias because product is not a requirement for doing business
  • The business can price each job based on value to be added and/or the time to be taken
  • Asset-based review fees should grow faster than inflation
  • You can explain to clients that if markets fall, your remuneration is tied to their investment success (for those on AUM charge)

Cons

  • Advisers must be able to demonstrate clearly the value that they will add relative to the initial plan fee and then back this up in the plan
  • Large plan fees may discourage clients from going ahead with you (less sophisticated ones usually)
  • In large market falls, your review fees can drop (although a mix of asset based fees and a retainer can offset this to some degree)

Fee strategy 2: Hourly rate fee

There seem to be very few advisers that genuinely charge hourly rate fees for their advice and those that do are often (but not always) working inside accounting or legal firms.

Some firms have an hourly rate option and use it for oneoff pieces of pure advice work or to cover the costs of the initial plan fee. At later stages
in the advice process, (implementation and ongoing review) other charging methods are used.

For example:

Hourly fee: £200 per hour (charged like accountant or solicitor would do)

Pros:

  • Very simple to understand
  • Positions the adviser like other professionals
  • May work very well for an adviser working in an accounting or legal firm
  • Adviser does nothing for free – gets paid for all work
  • Each client pays in some proportion to the demands they make on the firm
  • Positions the business as fee-based and with no conflicts of interest
  • If costed and delivered correctly, every job adds to the bottom line
  • Clients can benchmark the value received against what they are paying each year
  • Naturally discourages less sophisticated or poorer clients (if this is what you want to do)

Cons:

  • May not sit well with all clients
  • May leave the client not sure of how much their advice will cost (although a fee range may be quoted to overcome this)
  • May not let the adviser make supernormal profits based on value added
  • May be difficult to charge enough per hour
  • Hourly rates may need to be increased periodically to cover increasing business costs, inflation, and profit targets
  • Clients can benchmark the value received against what they are paying each year
  • Naturally discourages less sophisticated or poorer clients (if this is not what you want to do)

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