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IFA drops initial fee and sees client assets return to the fold

by Jun Merrett on Feb 07, 2013 at 11:42

IFA drops initial fee and sees client assets return to the fold

Newbury-based Meridan Park Associates has removed its initial fee for clients with more than £150,000 to invest in a bid to capture more assets.

Meridan director Bruce Foskett said he was not seeking to attract new clients, but to engender more loyalty from his existing client base.

‘We are experimenting on not making any advice charges on new investments at all,’ he said.

‘We used to work on 1% [initial] plus 0.5% [ongoing]. Now we’re not taking the 1%, which seems to be working quite well. People seem to be keen to invest. One or two clients who have stuff elsewhere are looking to bring it back into the fold.’

‘We have offices at home and we know how much it costs to run the business on a percentage basis. Ongoing 0.5% seems quite profitable. We’re looking for long-term relationships with clients,’ he said.

Former New Model Adviser® cover star firm Meridan started charging a 3% initial advice fee in 1996, moving to 1% in 2000, before cutting the initial charge in the beginning of this year.

The firm will still levy an initial charge of 3% for clients with under £50,000 and 1% for clients with a portfolio between £50,000 and £150,000.

33 comments so far. Why not have your say?

Robin Melley

Feb 07, 2013 at 12:19

How on earth do you fund the cost of initial advice and implementation? Also, doesn't it introduce cross-subsidy?

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John Burchett

Feb 07, 2013 at 12:21

Goes somewhat against the FSA decree that there must be no client cross subsidy.

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Sam Caunt

Feb 07, 2013 at 12:24

Where does it say that the FSA decree that there must be no client cross subsidy?

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martin beazer

Feb 07, 2013 at 12:28

Good on you Bruce, good luck.

@robin I would assume Bruce and the company have a nice client bank with plenty of "trail" coming in. He says he is not trying to attract new customers so its obvious he has enough coming in on a monthly basis to not need initial.

Trail is the way to go for show!

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Barman

Feb 07, 2013 at 12:29

I agree with Sam, I think this whole cross subsidy issue has been blown out of proportion. I dont think the FSA actually state it anywhere....

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James Clancy

Feb 07, 2013 at 12:29

The only way to get rid of cross subsidy is to charge by the hour.

See link below

http://citywire.co.uk/wealth-manager/kpmg-client-power-means-hourly-fees-for-wealth-managers/a605143/2

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Eastenders Fan

Feb 07, 2013 at 12:30

Good on Meridian.

If a client has £200,000 already with you and you receive 0.5% thats £1,000 a year. For a firm with low overheads that may be a reasonable figure to service cleints.

Therefore not a great problem if that client wants to invest another £100,000 with you and you charge no initial fee.

Result: you have a happy client that you give a good service to and the following year you receive £1,500 (£125 month) plus a bit more with fund growth (as no initial fee).

And plenty of introductions.

Sounds reasonable model to me.

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stephen lyth

Feb 07, 2013 at 12:47

He isnt offering any advice, what he is doing is purely transactional, he might be making a recommendation but that's about it. Good luck Bruce

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lost 4 words via mobile

Feb 07, 2013 at 12:55

Sorry but a business that doesn't charge 4 it's services is doomed to fail !!

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Hur Reebigballz

Feb 07, 2013 at 12:56

This proposition had me snookered for a while, but on reflection I think it could be a trick shot in so far as attracting new business is concerned. Let's hope this proves to be your big break, Bruce.

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Michael Brown

Feb 07, 2013 at 13:07

If you can make a profit out of no initial charge and only 0.5% PA one has to ask what is the proposition here?

You get what you pay for in this life and paying nothing usually means getting nothing or not much quality

I would rather pay for Heinz beans than the value brand for a quality result.

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SWW via mobile

Feb 07, 2013 at 13:16

This is a crazy business model. Client could walk away the day after you place the business and you carry the liability for the advice for life. Low overheads or not it smacks of buying business from clients or he's struggling to justify his fees. I just don't get it!

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Doug Brodie

Feb 07, 2013 at 13:35

What happens if he's in the bath when the client pops round?

(Also not sure how this for existing clients....they already have their money in the firm, or they wouldn't be clients?)

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Ted Shaw.

Feb 07, 2013 at 13:52

If he is not trying to recruit new clients then why is he advertising the dropping of the 1% initial. What happens if he does the advice work and the Client decides not to follow his recommendations? How does he get paid for the work? I presume he charges a fee, how much though or is that 'free' also?

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MR C.

Feb 07, 2013 at 14:20

Madness or desperation. Possibly both.

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Richard Ross

Feb 07, 2013 at 14:34

We do the same and its not about cross-subsidy, its about considering the lifetime value of a client. The start of any relationship involves an exchange of trust - the client is investing their money as their sign of trust, we reciprocate with an investment of our time.

It means our interests are more closely aligned, we both need the relationship to work in order to profit. I haven't discussed this with the FSA but I am confident they would be happy with this approach

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Knowledgable insider

Feb 07, 2013 at 16:34

If you want a monkey you know what you have to pay

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headbelowthe parapet

Feb 07, 2013 at 17:09

@ Sam Caunt

There's a whole section about cross subsidy in CP 09/18

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headbelowthe parapet

Feb 07, 2013 at 17:15

Also the RDR Newsletter issued in August 2012:

"...to set advice charges so they are ‘reasonably representative’ of the services offered. This prohibits firms cross subsidising advice charges, with profit made from other parts of the business."

So the FSA do indeed have a view on this.

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Richard Ross

Feb 07, 2013 at 17:27

there seems to be an absence of understanding of the concept of marginal revenue - it's really not rocket science and even a monkey should be able to grasp it..........

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EVHE

Feb 07, 2013 at 17:41

If your clients are happy and your business prospers then good luck to you.

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headbelowthe parapet

Feb 07, 2013 at 18:31

Richard cross-subsidy is a fact of life, no matter which walk of life you happen to be loping along.

Just because the FSA have a view that doesn't mean they actually grasp what it means - like so many other things it appears that the FSA has little understanding of economics.

It is nonsense to suggest that cross subsidy should not exist, we IFA's stand Canutesque telling the laws of economics that they should not apply to us because the FSA don't have any truck with them...the tide will turn. But the FSA will still point at us and bleat about cross subsidy being wrong.

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Richard Ross

Feb 07, 2013 at 18:59

I think there's a fundamental difference between cross-subsidy and considering lifetime value. The former occurs when the revenue generated in respect of the advice given to a 'lower value' (for want of a better term) client is less than its cost and therefore there is subsidy from 'higher value' clients. A lifetime value approach means that while there may be cashflow timing issues there is no intertemporal cross-subsidy.

Marginal revenue considerations mean quantifying the 'cost' of a particular piece of advice is problematic (even for hourly charging advisers - consider for example CPD which must be undertaken regardless of the number of clients) but the general principle is perhaps easier to grasp than the detail.

The FSA are entirely correct to object to the former and it is no reflection of their knowledge of economics. However, seeing them actually prove it had happened would be interesting.

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headbelowthe parapet

Feb 07, 2013 at 19:43

Richard I think you're wrong, there is no difference between the two. You can discount utility as much as you like but it still has cross subsidy at its heart. For example, if a client were to die much earlier than expected who will compensate for the future earnings you can no longer enjoy? The only logical and true answer is the remaining clients.

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Brian via mobile

Feb 07, 2013 at 20:08

So I have 140k to invest and get charged £1400 but my neighbour with 150k gets no initial charge? That's where it's flawed.

Where's charge for advice? The liability needs covering.

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Richard Ross

Feb 08, 2013 at 09:34

Head below – I disagree. There are two ways of looking at this (well there’s more but let’s stick to two). The first would be to establish the cost of advising a particular client. I would argue it is close to zero. If you are already paying your salaries, establishment costs etc then whether you are advising the client or posting on Citywire the costs will be the same. The only additional costs are sundries like postage. If we borrow backward induction from game theory we can apply the same logic to each client in your client bank and get the same result – which means that while it costs money to service all your clients, it costs close to nothing to service an individual client. Some would call this a paradox – I can quite understand if most call it something else ending in …ox! It then follows that for any client even if there is cross-subsidy it is close to zero.

An alternative solution is to consider expected utility. At outset you would have an expected utility from a client, probably based on a NPV derived by discounting future income flows. This would both provide a means of comparing different fee structures and also allow a test against some notional share of overall costs. This would identify clients who are unlikely to ever meet their share which I think would meet most people’s definition of cross-subsidy.

The issue of clients whose circumstances change can be dealt with in several ways – you can argue as above that the cross subsidy in negligible (I appreciate the obvious conflict in this argument!), you could discount the expected utility or you could create a quadratic regression model with something like 1000 as your beta zero and values for betas 1,2 and 3 which reflect your proportionate charge, fund growth and longevity from which you could establish a 95% confidence interval – which all seems a bit involved.

An easier way is to say that under our charging structure (which is slightly different to the one described in the article) it takes around six years before we are back to where we would have been under a more conventional structure and empirically most clients reach this milestone.

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headbelowthe parapet

Feb 08, 2013 at 13:47

Hey Richard - we could probably argue semantics all day.

But I suggest that while your argument may be theoretically sound, in reality it is flawed. In theory the cost of advising each individual might be thought of as negligible, but in reality fixed costs must be paid for otherwise a business must surely fail. I suppose the cost of advising an additional client might be considered negligible as per the marginal revenue model, but this would then suggest that the cost of advising the first client might be the greatest, which in real world practice is also obviously wrong.

The point that I was trying to make is that the regulator seems to dislike the idea of cross subsidy, which is ridiculous.

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Knowledgable insider

Feb 08, 2013 at 14:07

Lets put this to bed....whatever you wish to charge an individual client is your choice and the clients if he agrees. Some clients are more difficult and time consuming whilst others are not. What business is it of the FSA is beyond me or are we now living in a commuist state where the authorities dictate the price of evrything?

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James Hurdman

Feb 08, 2013 at 14:20

A fantastic exchange between headbelowthe parapet and Richard Ross - I particularly like the post by Richard Ross at 9.34; a very well considered and constructed thought process. I too have given this a very great deal of thought and one alternative of course is to charge 3% initially then 0.5% annually.

On a serious note, every business has different objectives, costs, business models and unique characteristics. As long as a client is not getting ripped off and they know what they are being charged for and the value it brings, should we be criticising the business models of any other advisory businesses? Surely it depends on how you want to run your business.

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Richard Ross

Feb 08, 2013 at 16:39

Confession time - I was only trying to prove a point because I didn't much like being compared to a monkey.......

While its up to everyone to decide on the model that suits them and their clients it is also true that too few businesses generally (not just IFAs) are profit maximisers. Often this is because they lack the capital base to support the most profitable model and instead have to opt for short-term expediancy.

And a final riposte before I head off for a beer - the first client IS the most expensive.

cheers

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Scott Gallacher via mobile

Feb 10, 2013 at 08:51

I think the FSA's point about cross-subsidy is intended for vertically integrated firms for as SJP and the old Equitable Life, i.e. you can't use product charge profits (as opposed to adviser charges) to fund cheap or free advice

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Rob Stevenson via mobile

Feb 10, 2013 at 09:40

Out of interest, do any of the above contributors have 6+ staff total?

Having worked with lots of advice businesses in the last 8 years, finding the right business model is key to growth.

What you charge clients is only part of the equation. How you pay advisers and how you account for so called fixed costs is critical.

The above exchange, while rare in its quality, doesn't appear to have much relevance to a firm turning over north of say £1m.

If my thinking is off, tell me why?

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David via mobile

Feb 10, 2013 at 09:51

I have been using a similar model for years now, we have over 30 million and only 120 clients, when any of them get new money they are straight back to me as they know they don't have to negotiate and can take there money back without exit penalty any time they want, they can also turn of the fee without notice, as for liability treat your customers fairly review the funds on a very regular basis, don't charge switch fees so they know there is no conflict of interest if they move funds and they are paying again, don't buy what you don't understand, don't buy products that you can't get out of the day after without charge, review even when the clients are loosing money and explain why, always have a next review date, and diversify, if you do this you won't have any complaints.

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