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Financial planning is the key to the 1% challenge

by Nick Cann on Jan 25, 2013 at 12:45

Financial planning is the key to the 1% challenge

The move to fees is over but the battle to justify a 1% charge has just begun, and financial planning provides the weapons you need to show you give value for money, writes the Institute of Financial Planning chief executive Nick Cann.

Whatever your state of readiness for the post retail distribution review (RDR) marketplace, these are certainly interesting times for our profession. It is particularly interesting to see how business models have evolved as advisory firms tackled the RDR’s demands in an attempt to be somewhere near the regulatory requirements ahead of the 31 December implementation date.

In recent years, the historic norm of 0.5% trail has been increasing to 1% for ongoing service because, for many, this more closely matches what is they need in return for the service they provide. Some advisers will be providing a service to that value and others will be delivering even more; but there will also be some whose service does not live up to their clients’ expectations.

While a 1% charge may not sound a lot, it is easier to apply when markets, and hence the value of clients’ investment portfolios, are rising strongly. In the current environment, where investment returns remain under pressure and in many cases the investment has been outsourced, the situation might be different. Add in the need for greater transparency, a pounds-and-pence translation of the 1% and an increased interest around cost, and the task becomes more challenging.

The core of success

Many accredited financial planning firms and others, such as certified financial planner professionals who have already been operating a fee-charging model, have been dealing with this for years and continue to grow successful businesses.

At the core is the provision of a comprehensive financial planning service. But not all advisers are financial planners. They need to shift their focus from the recommendation of products and investments to the genuine requirements of the client, beginning with the end goal firmly in mind. In this model, the value has already been transferred to the planning rather than the regulated activity of selecting products.

Building trust

Yes, the products remain important but only from the perspective of allowing the client to achieve their goals and objectives.

The planner needs as close to 100% of the client’s relevant information as possible. This provides the platform to build a long-term relationship based on trust and which continues to add value throughout the journey.

The focus is firmly on the client and the likelihood of them being able to achieve their goals. There will be defined priorities and actions. There will be commitment on both sides and there will be a clear delineation of roles and responsibilities, which will include the client’s expectations.

The ability to use cashflow modelling or, at worst, the shortfall analysis that a financial calculator or Excel spreadsheet can provide, opens up the possibilities for a client. Once they trust the planner and the firm that they work for, they are prepared to engage fully with the process and what is genuinely important to them.

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16 comments so far. Why not have your say?

Hickky

Jan 25, 2013 at 13:38

Once again good advert for a certain company. Pay the fee and we will provide a certificate after an exam, and you will all be wealthier. Is a 1% fee justifiable?

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Donald Shimoda

Jan 25, 2013 at 13:59

Disagree Hickky. It's an advertisement, a plea from Nick, to Advisers to get their proposition right, before it ends in tears. Charging 1%pa without comprehensive financial planning is ripping people off. But 1%pa WITH is fantastic value as it can deliver life changing client outcomes (if delivered properly).

Qualifications, certificates stuck on the wall is no benefit whatsoever. That is just yet another illusion for Advisers to hide behind, like being fee-only was in the past. Like moving to 'passive' WAS, not any more. Like pretending to be an 'investment guru' (still is). All these illusions and 'temporary' USP's are falling away.

The ONLY thing that matters now, is having a service that's worth paying for. That service needs to focus on providing BENEFITS, (i.e. helping clients get what THEY want), not mere features and expectations (wraps, newsletters, qualifications, regular valuations blah, blah).

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Ross Glanfield FPFS

Jan 25, 2013 at 14:01

Let's be clear here - charging the client 1% of their assets under management is not a proper fee agreement. It is a sham and it shows that the adviser has given no thought whatsoever to what a client needs and what they need to charge for their service.

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Alwaysright

Jan 25, 2013 at 14:41

"They need to shift their focus from the recommendation of products and investments to the genuine requirements of the client, beginning with the end goal firmly in mind"

Good grief!

Talk about shooting yourself in the foot.

What about keeping an open mind?

What is the "end goal"? Selling a product?

I could weep if i wasn't so tired of all this.

And as for trail commission (sorry, charges for ongoing service), let's get it straight once and for all:

A percentage charge based on assets under management is no different from a trail commission.

A fee for ongoing service should be charged either on a time spent basis or according to a schedule of fixed fees.

How would you feel if your local garage charged for their services based on a percentage of the value of your car?

Maybe I will weep after all .......................

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Daniel Hill

Jan 25, 2013 at 15:33

I agree with Alwaysright.

Imagine how you would feel if the FSA had just moved to charging their fees based on how high your turover is rather than the number of advisers they are regulating within your company!

Imagine if fund managers charged you a fixed fee based on the number of flights they make to China and how many analysts they have per fund rather than a percentage of the fund value!

Imagine if P.I insurers charged you solely on the type of business you write and your average case size rather than largely on a percentage of your turnover?

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James DLW

Jan 25, 2013 at 15:34

@alwaysright

I think the % vs hourly fees debate is quite difficult one for our industry due to the nature of the way advice is provided. I must have spent a considerable amount of time discussing this with colleagues and we eventually decided the % route, plus ad hoc fees in certain circumstances.

The reasons for this were thus:

1. If a client knows they are charged every time a bit of work needs doing or even worse every time his picks up the phone to his adviser this can have unintended consequences. We felt that this would lead to a reactionary rather than proactive service and which was against our client’s best interests.

Although I appreciate some clients may like to operate in this manner it did not fit with the ethics of service and running both methods was just too complicated.

2. Imagine you have 2 clients approach you for advice. Their situations are absolutely identical, the amount of work required is identical and the recommendation identical. The only difference is when the client came to see you, the first client came 3 months prior to second. If we charged on an hourly basis then it is probable the first client would have paid significantly more due to the nature of the research required.

The same principal works for ongoing advice and in an effort to be fair to all customers we felt a % fee achieves this.

3. As advisers we are liable for our advice. Whilst one would hope and expect our advice is always correct if it is wrong and a client suffers losses these need to be compensated. The higher the amount the higher the potential compensation. So essentially it’s a bit like car insurance (rather than a car mechanic), the more expensive the car the more expensive the insurance.

4. It can be complicated recording everything on an hourly basis. I know other industries manage this but it would take a considerable effort to get the systems in place to arrange this. It’s even more difficult trying to run on a % fee and hourly fee.

5. Most clients find a % basis clearer, easier to understand and they know what to expect. When most platforms and fund manager charge on a % basis it makes sense to use the same methodology.

6. An old one but still has some truth ‘It aligns our success to the clients’. Markets go up, so does our ‘take’, and vice a versa.

Whilst I am not knocking those who charge on an hourly fee or flat fee basis (which we use for some initial work if there is not a product sale at the end) we felt that for our customers and the service we’re looking to deliver this was the best route for us.

I'd also point out that the difference between a trail fee and trail commission is that a trail fee can be turned off. If a client doesn’t think it’s worth paying for they can always turn it off.

PS we charge 0.75%-0.5% as a trail fee.

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Nick H

Jan 25, 2013 at 15:45

Ross and alwaysright (are you related to my wife by the way ;-) )

I agree - very hard to justify, and will translate to a ludicrous hourly rate in most cases, in context of work undertaken.

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Alwaysright

Jan 25, 2013 at 15:57

James DLW

You make a good case but I still can't understand what is inherently "fair" about a £500k client paying up to ten times more than a £50k client for an identical amount of work.

"It can be complicated recording everything on an hourly basis..................... it would take a considerable effort to get the systems in place to arrange this." Aw, shucks!

Nick H

For all you know, I am your wife !

Daniel Hill

Eh?

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James DLW

Jan 25, 2013 at 16:06

Alwaysright – I agree.

That’s why we charge on a sliding scale depending on the amount invested - both on an initial and ongoing basis.

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Nick H

Jan 25, 2013 at 16:27

alwaysright .... i doubt it - youre talking sense!!

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Richard Macmillan

Jan 25, 2013 at 17:44

Yup, Paul Armson has been saying this for years.

If you really want to get to grips with a fantastic proposition that clients value, understand, enjoy and will pay for, go to www.InspiringAdvisersOnline.co.uk

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Andrew Peirson

Jan 25, 2013 at 18:50

I agree with Richard.

www.InspringAdvisersOnline.co.uk is a great step by step programme which focusses on how to deliver a service clients really want and are prepared to pay for.

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Graeme Laws

Jan 27, 2013 at 12:52

"It's like this Mr Client. You have £500000 to invest. I'll advise you and keep in touch, and you'll pay me 1% a year over and above what the product providers will charge. That's £52311 over the next ten years, unless of course your investments increase in value, in which case it will be more. Or you can pay me a couple of grand up front, and a grand each year if you choose to have a full review with me. That's £12000 over the same period. Choosing the cheap 1% route is clearly in your best interests It's only four times the price of the expensive route."

Pull the other one you lot. No wonder more and more people are doing their own thing with Hargreaves and others. The percentage brigade will get away with it for a while yet, but watch out for the fun and games when the RDR review discovers - surprise surprise - that nothing has changed.

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Bob Donaldson

Jan 28, 2013 at 18:12

This is about the IFP members reinventing themselves so that they are offering something different. It is the same they talk about lifestyle coaching or suchlike. These are often things advisors do when they have had no formal training. For example how many clients talk to you about lifestyle, quality of life, can I afford to retire.

I have been carrying out spreadsheet calculations for clients with a budget for years. The good thing is once the spreadsheet is done, it is only a case of tweaking it every time you meet with the client by updating the figures.

I have seen people present books of cashflow modelling which often confuse the client however, I do agree whatever you do you need to be able to justify your fee to the client.

Once people start shopping around it will be interesting to see where this all ends up. In tears for some advisors I fear who have been giving a mediocre service for years but getting away with it.

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Steve Billingham

Jan 31, 2013 at 19:18

Looks to me like there is momentum building towards an alternative to both the 1% (or any % frankly) model (which can result in ridiculously disproportionate fees for HNW clients) and hourly rates which penalises the client for adviser inefficiency (potentially) and the adviser, who can't charge a fee that truly represents the value of their advice.

Struggling to see what is wrong with the "flat fee for defined service" model as long as you have the bottle to challenge clients who abuse it. Long term I believe this will be the model that prevails. It makes 1% look outrageous at higher asset values.

It has it's challenges (because you can't grow your revenues on the back of a rising market... and why should you!!) but also it's advantages, such as highly predictable revenues in volatile times.

Those who believed the a "flat earth" were proved wrong. Those who believe in flat fees? Maybe not!

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Duncan Hannay-Robertson

Mar 04, 2013 at 23:24

If you sold the same watch in Harrods, John Lewis or in a car boot sale they would all be different prices. It's a free market so it really all depends where you are pitching your business. No one can tell you what the right price is because we all put a different value on it and it's the customers choice. David Beckham spends £14,000 per night on a penthouse. How do we value that?

Therefore everyone who has commented in this column is right bececause you are framing it from where you are coming from.

If you are going to charge a premium for your service, then you have got to demonstrate to your customer that you are delivering extra value. If they don't think you are, that's when you are in trouble.

Remember, the investmemt management industry has been charging 1.0%pa for the last few decades and they don't add half as much value as a financial adviser or financial planner.

This internecine squabbling is quite comic though. We really should be sticking together rather than pulling each others hair out!

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