Where will adviser charging be, not just on 31 December, but a year or two from now, we do wonder.
On the basis that a business should be forward thinking, I proposed a different approach to many firms that we have now adopted as our adviser charging model.
Percentage charges clearly work against the interests of larger investors, but how do you create a model that acknowledges the growing risk of product advice as well as size of investment utilising hourly rates?
A knowing customer will happily pay fees if they understand how they are made up, arbitrary amounts serve only to add to past mistrust towards financial advisers.
Core Financial LLP’s adviser charging model costs out work based on the time it takes, splitting adviser time and admin time, each costed at different rates, not too unusual. But, how does this take account of the risk of advice?
Well, we apply two multipliers, firstly to the adviser time, a product multiplier based on the risk of the product plus a size multiplier based on the size of the investment. These are applied when the advice is given but not at review stage, unless an incremental investment is made. Even with the application of a size multiplier, the larger investors are suitably rewarded for committing more capital, as they should be, percentage led charges as noted above unfairly penalise these sought after clients.
So far our calculations have been accepted without question, in fact we have been complimented by clients on such a full description as to how their adviser charge is created. For those that insist on percentages we will also detail the charge as an expressed percentage, however never forget it is led solely by monetary charges.
A word on hourly charges: If a Solicitor, as an example, picks up a letter, reads it and thinks “I’ll look again at that later”, he may use 20 seconds of time but bill 6 minutes, or more. You can quickly see how modular timed charging can weigh against a client. Hence we firmly believe that charges should be levied on the time it actually takes to do the job, simple and fair.
Perhaps the biggest danger to advisers is the inability to convey the value of charges. The broad brush just doesn’t work, that is not an RDR thought it is simply the psychology of fee charging. Whilst we accept that profitability is under threat in 2013, an adviser charging structure will probably be more successful in so far as it is less opaque.
We constantly assess adviser charging structures that are a room of smoke and mirrors with one ultimate beneficiary, the adviser. Both consumer and adviser can prosper in 2013 as long as they are up front with each other. Yes it does of course work both ways and there will be more shopping around and this is healthy, but less so if the shopper is browsing due to lack of transparency in models put before them.
We are shortly introducing a new website that includes a case study example, so keep an eye open and good luck with your own RDR proposition. We are also working on an app to allow customers to calculate likely charges for advice.
Sustainability of any model will perhaps be tested by how you stay within the spirit of the intended change but consider using risk multipliers that are fair both to the adviser and their clients.
Editor’s note: In response to some of the comments, Trevor has added additional information regarding his charging structure:
We are approached by a Client that has a simple need to grow their investment portfolio over a defined period. The investment value is £100,000. After the first meeting which is free and without obligation, we agree objectives and set about designing the most appropriate strategy and products (where necessary) to achieve the desired outcome. Now let’s assume for simplicity purposes that we assist the client in selecting an appropriate composition of unit trusts/Oeics, perhaps utilising Isa allowances where we can.
We first cost out the time it takes to do the work, this is split between advisory time (£150 per hour) and administration time (£75 per hour):-
2 hours advisory time. =. £300.00
3 hours admin time. =. £225.00
Total. =. £525.00
That is the basic price of advice, on top of which we add a product multiplier (in this case 1.1) and then a size multiplier for this size of investment it would be 1.35.
So, the final advice fee would be £525 x1.1 x1.35 = £779.63,or, as an expressed percentage, 0.78 per cent.
If as often we agree a regular review this is costed also on the ‘time it takes to do the work’ but does not involve product and size multipliers.
Trevor Whiting is partner at Core Financial LLP