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.
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.’
Bamford says both project fees and percentages work well. ‘We introduced adviser charging in 2004. Since then, we have been charging a project fee for advice, an implementation fee expressed as a percentage of assets and a percentage fee for ongoing review,’ he says.
However, the RDR prompted Bamford to review his fee model again and increase his minimum initial advice fee to £1,345. He says Informed Choice is shifting the emphasis towards that advice fee and away from the implementation fee. It has increased its ongoing review fee from 0.6% to 0.75%, to reflect the rising regulatory costs and the more intensive ongoing service it delivers.
Charging by the hour
Neville Pereira (pictured above), financial services director at London firm Lubbock Fine Financial Solutions, is a strong advocate of hourly rates.
‘It’s an embryonic profession,’ says Pereira. ‘As clients become more aware of charges, including historical trail commission, advisers will need to justify their fees and consequently I can see more advisers charging [hourly rates]. Furthermore, not every client wants a service proposition offering and you have to work on a fee basis for them. Charging fees will make the advice process more efficient as one can ascertain what is cost-effective and what isn’t.’
An argument against hourly fees is that it discourages clients from calling advisers or having in-depth discussions. But Pereira says this is unfounded.
‘The idea that it discourages advisers from talking to clients is a fallacy. Other professions also engage in this dialogue. One simply needs to separate billable from non-billable work,’ he says.
However, Phil Billingham (pictured above), director of London-based Perceptive Planning, believes hourly charges will always be unpopular. ‘There is so much evidence that clients do not like hourly rates, especially uncapped. Increasingly, solicitors are moving away from hourly rates because they don’t help the relationship,’ he says.
‘An understanding of the hourly costs and being prepared to deal with hourly rates if required, like on a straightforward report, is right. But it won’t ever be the main business model for the majority.’
Realising their value
Michelle Hoskin (pictured below), founder of Standards International, says advisers will continue to increase their charges as the importance of the profession becomes more established with the public.
‘Through a lack of confidence, firms have set their rates based on what they believe their clients will pay as opposed to the value they add. However, as confidence grows, and they begin to realise their value and positive impact on clients’ lives, increasing charges is probably a step in the right direction,’ she says.
Pereira also believes advisers will eventually realise their worth. ‘Advisers need to realise they are the only people in the country who can transact, implement and advise on retail investment products. As time goes by and advisers understand that value, they will increase their fees,’ he says.
The best way to present an increase is in the context of an overall cost reduction.
‘There is a lot of angst about the 1% charge,’ says Billingham. ‘Historically, the total costs of managed funds, particularly fund of funds, were between 3.5% and 4% a year, of which the adviser got 0.5%, took all the risk and did all the work. They did the most and got the least.
‘We are moving to a world where the adviser has to increase their charge but the total cost has to come down to 1.5% to 2.5%, including 0.75% to 1% for the adviser. The client and adviser benefit, and the others in the chain are squeezed. That is only right and we mustn’t be ashamed of it.’
The next steps: Price Bailey’s plans for the RDR world
Through auto-enrolment, thousands of employers and employees will join pension schemes for the first time. There is an opportunity for advisers to set up and look after workplace pension schemes, but how to charge for their services poses a challenge.
The majority of Price Bailey’s income is fee-based and recurring but it has taken on some employee benefits work in the past. James King (pictured above), partner and head of private client department at the London-based firm, says: ‘In the past, we have charged a fee for employee benefits that would be factored in as commission. Now we can’t do that, it is taken out of the premiums over 12 months.
‘That is a cashflow issue and we had to change our wording to the employer to indicate: "This is our charge, and if employees don’t pay, we will charge you,"’ he says.
Price Bailey charges employers £250 per member, which can be taken out of the employee’s contract over a 12-month basis. However, if the employee only has two premiums paid in before leaving the scheme, the employer is charged the difference.
As the RDR starts to bed in, Price Bailey is considering an online execution-only service.
King says: ‘If clients want to do their own thing [in terms of managing investments], we want to give them that facility. But if they need an adviser, they can press a button and speak to one who will charge accordingly. That is just about using technology and I am currently discussing it with the relevant people.’