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Adviser charging debate rages on in the new world

by Tim Cooper on Feb 21, 2013 at 15:13

Adviser charging debate rages on in the new world

Advisers like David Batchelor (pictured) who ask clients to write a cheque may still be in a minority even in the RDR world, and opinion on the best charging method is as divided as ever.

In the retail distribution review (RDR) world, the majority of advisers have moved to adviser charging facilitation (ACF) through a platform or product. However, alternative fee models remain, with direct payments for a project, percentage of assets and hourly charges being used.

Some question whether ACF is sufficiently different from commission and whether the incoming regulator, the Financial Conduct Authority (FCA), would eventually scrap it in favour of direct fees.

David Batchelor, director of Aylesbury-based Wills & Trusts Chartered Financial Planners, is concerned the commission ban is not working. ‘The RDR is all about charging fees rather than taking commission. So why is it that, speaking to advisers, less than 25% actually take a cheque from clients?’ he says.

‘Most take fees as either a deduction from the investment or pension, or from a trail fee. But if you ask clients to pay a cheque for that amount, many would not do it.’

Batchelor says either there will be no change – fees will continue to be taken from investments and clients will still ‘not really understand what they are paying’ – or the new regulator will start looking into trail mis-selling.

‘If they want to do the job properly, they will insist that all clients pay directly. I doubt that would happen, but it would make the client think about what they are paying and the value they get. If cheques had to be written, it would drive down fees dramatically,’ he says.

Client’s choice

Martin Bamford (pictured above), managing director at Surrey-based Informed Choice, says he gives clients a choice of ACF or direct payment.

‘We remain flexible in terms of how clients settle fees, either through ACF or by invoice,’ he says. ‘Invoices are becoming increasingly more efficient, rather than using providers as the payment mechanism.’

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10 comments so far. Why not have your say?

Smartone ha

Feb 21, 2013 at 16:22

As long as advisers are being clear and transparent, who cares how clients are charged....there isn't just one answer in isolation of others. As Martin says, just offer the client a variety of different payment solutions and let them choose.

Over the last 4-5 years, FSA, FSCS, and PI charges have gone up considerably, not helped by the incompetant FSA who are blind to their failures with KeyData, Arch Cru and Wills & Co, now Direct Sharedeal and their incompetance will lead to increased costs paid for by clients through adviser charging (one way or another). I totally see where Martin is coming from...the 0.5% world is fast becoming 0.75%. If the FSA dont spot the next failure, they will pass yet more costs onto us to pass onto the client.

Just like the insurance industry, its those who dont make claims who subsidise those that do. Isn't cross subsidy something that the FSA tried to prevent??

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John Burchett

Feb 21, 2013 at 16:37

Billable and non billable. That's a minefield.

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Feb 21, 2013 at 16:58

Let's just remember, fees paid direct to an adviser are out of the client's taxed income and could be attackable for VAT. Whereas fees paid by deduction from a pension have received tax relief at the client's top marginal rate, fees paid by sale of units from a unit trust could utilise some unused capital gains tax allowance, and fees paid from the sale of units in an ISA can come from untaxed income instead of taxed income. Then there is the VAT question, fees paid from the provider may be more likely to be unequivocally intermediation than when paid to the adviser. Investment bonds are the only issue, the sale of units is a partial withdrawal, so could cause higher rate tax payers problems. The best way to pay for our services will vary from client to client and the tax treatment is going to be a big factor.

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Phil via mobile

Feb 21, 2013 at 17:10


Isn't this subject a bit boring now?

No adviser is right because it just about asking what the client wants to do. Remember them?

Also can we all remember that clients hate hourly rates from solicitors and accountants as well. Both of the above professions offer fixed fees for certain types of advice such as conveyancing or completion of tax returns, and they also offer percentage fees for probate work or advice on selling a business etc. IFA's need to stop criticising each other and let it go. Just get on with advising and running a profitable business.

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Hugo Craggs

Feb 21, 2013 at 17:23

forgive me - wasn't RDR about removing commission bias rather than making all clients pay separately? if clients understand what is going on and are getting value for money and understand how much and how they are paying for the advice/service that should be sufficient.

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Sam Caunt

Feb 22, 2013 at 08:55

This is still an important because clients are being told our fee is 3% commission. Whether we like it or not, the majority of advisers are still working in the same old way and the current on-going thematic review will come up with good and poor practices – put another way how the FSA expect you to work adviser charging where previously guidance has been zilch . The FSA could have made it so much easier for everyone by requiring advisers to issue scope of work statements (tenders for work if you like) in which an adviser describes what he will do for the client and provide an indication of how much it will cost. When the work is complete an invoice is issued to the client so that they know exactly what they are paying for the agreed service you provided. If paying by cheque, client sends a cheque in, if via adviser charging the you can write paid through the invoice. What is difficult and unfair about that?

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Usually found sitting on the fence

Feb 22, 2013 at 09:46

@ Phil - Do clients hate hourly rates with solicitors and accountants or do they hate the rate? It's like most people are shocked by the labour cost for a mechanic, but that's just because they have had to shell out for a load of parts first and when you buy a tyre there is no labour charge... It's about perception and what you measure it with. Remember most clients will be measuring it against how they paid before and if not explained properly they will not be left feeling happy.

As someone else mentions, it has to be about me, me the client and what I want. It has to also be about you, you the adviser and how simple or complicated you want your charging structure/method to be.

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Feb 22, 2013 at 12:06

@ Usually found sitting on the fence

Client DO hate hourly costs, partly due to the cost per hour but mainly due to the uncertainty of what they're going to pay.

We provide a breakdown of what the client's objective is and what work we're being asked to do before commencing the work. This includes a statement showing the maximum estimated time it will take and the hourly rates that will apply. This therefore gives us an upper cost limit, which we will not exceed without reference back to the client. The statement confirms that the client will pay a lower amount if the work takes less time.

Whether this then comes to us via cheque or from a product is irrelevant to us, and is simply down to client preference. We will provide suggestions as to whether its beneficial to pay by cheque or from the contract (pensions being a good example), but ultimately its their choice. As mentioned above, it's about transparency not where the money comes from.

I've argued for years that the "fees issue" is in the mind of the adviser, NOT the client. If you don't believe in the value you are providing, the client never will.

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Usually found sitting on the fence

Feb 22, 2013 at 12:43

@ Gareth - So it is the uncertainty that is disliked and you have a suitable method of navigating round this issue. You calculate an expected time to perform your role, based on experience, and cap the cost accordingly.

From a personal perspective, I would rather see advisers paid according to the value they add. On investments growth is reasonably easy to measure, but on insurance products the value added is often not visible until needed... So perhaps a cap on commission for insurance and commission/invoicing based on growth for investments would have been better... (allowing for a capped up front initial commission).

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Feb 22, 2013 at 13:51

@ Usually found sitting on the fence

I would agree with you on the "paid by the value added" approach, however this is not always easy to quantify, insurance being a good example. For example, life assurance is either the biggest waste of money or the best thing you ever did, depending upon what happens. Quantifying the "value" in this situation is therefore impossible unless they die.

The majority of my clients are older, and therefore what they look for from their investments & advisers tends to be different. Using your example, structuring an investment portfolio for someone in such a way as to limit volatility can add an enormous amount of value to the client, but this cannot be judged using the usual metrics.

The feedback we get is that it’s the lack of worry and the reassurance we add that is valued by clients not capital growth, and this is something which is difficult to measure. Various surveys over the years have said similar things (JP Morgan's "The Wealth Management Reprot" from a couple of years' ago being the most recent I can think of).

For me, the key is to make sure the client knows what they're going to get, how much they're paying for it and where that money is coming from.

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