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Weigh up the pros and cons

A question that keeps coming up in seminars is remuneration. Over the next few months, I want to look at the remuneration options for advisers in a post-RDR world

I normally start my seminars by asking the attendees to tell me what they want out of the session. I am now seeing two topics highlighted by virtually every delegate: “What does good segmentation look like?” and: “What are my remuneration options in a post-RDR world?” You have probably had more than enough segmentation theory, so over the next few months I want to look at the remuneration options for advisers in a post-RDR world.

Let’s look at fees.

Fixed fee

Agreeing a fixed fee for the year or for a particular project can help the client budget for the cost. However, the fee must be carefully considered and a contingency sum must be built in to cover unexpected events that may require additional work. Invoices are usually prepared quarterly for the yearly fee and at the end of the project for a fixed fee.

Benefits

The client can budget for expected costs.

You can predict cashflow and manage the business accordingly.

Such fee clarity gives the client certainty and engenders trust, which leads to repeat business.

Negatives

You may charge too little for the work involved.

A competitor could undercut you.

It’s awkward to go back and ask for a higher fee if the work involved leads to a loss for the business.

Time related

This is a commonly used fee structure for solicitors and accountants. In this structure, each member of the firm has an appropriate hourly charge rate. Any work completed for a client or customer is logged onto a time recording system and invoiced, normally each month. The client or customer receives an invoice and usually an activity-based breakdown of fees charged.

Benefits

You get to invoice completed work quickly.

It gives the client fee transparency.

It’s clear to everyone what is being paid for.

Negatives

As the level of fees will fluctuate monthly, this could have negative impacts on cashflow and affect medium to long-term planning.

The client has no control of the amount invoiced so cannot budget accordingly.

Administering the production and issuing of monthly invoices takes up time.

Fee per client or customer

This option is only really suited to group pension clients.

A fixed fee per head is charged to cover all the work for each member. The level of fee may range from £50 to £250 and is usually invoiced quarterly, with a reconciliation exercise at the end.

Benefits

It is easy for clients to budget for defined and expected costs.

You can predict your levels of income, which aids cashflow. This is easy to explain and operate.

Negatives

It is debatable if this is a transparent fee and there is extra work for your administration team to reconcile membership numbers and fees.

Fees charged could fluctuate as members leave or join the scheme. Producing and issuing quarterly invoices takes time.

Retainers

The adviser agrees an annual fee budget in advance with the client, who pays an amount each month, normally by direct debit or standing order. At the end of the year, the adviser compares income received with time charged. If there is a shortfall, the client makes a balancing payment to cover it. Any surplus may be offset against the next year’s fees.

Benefits

This is easy to explain and operate and clients can budget for defined and expected costs.

You can predict your levels of income helping cashflow. It can also turn unprofitable clients into profitable clients.

Any shortfall can be invoiced at the end of the year or any surplus offset against next year’s budget.

Additional services not covered by the retainer can be invoiced separately.

Negatives

You have to be careful as the retainer may not cover the work done or the time spent with the client.

If your retainer is too high, you may be undercut by a competitor.

You need to explain to the client what is covered by the retainer and they have to understand this.

As you can see, there is no one ideal model. You need to decide what’s best for your business, clients and customers.

To see your full RDR remuneration options, visit www.aegonse.co.uk/businessbrain

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