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.
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.
The review or planning meeting should have an agenda reflecting that mutually agreed action plan. It is a world away from the uncomfortable shuffling of portfolio statements with an awkward conversation about performance or lack of it.
The right price
Is 1% the right fee? A good financial planning service has to meet the client’s requirements. Trying to cram three or four meetings, newsletters and a whole range of extras into the 1% is futile if the client does not want this or is unable to see any value.
Understanding client profiles and what is important to them will help to drive the service. Ancillary services need to be well thought through and particularly where planning firms target similar types of clients, there will be opportunities to cover off subjects as part of seminars or client focus groups. A value-added financial planning service will ultimately underpin everything else.
Establishing the appropriate fee depends on the business model and the service provided. It is based on the cost of providing the service plus the profit margin the business needs to flourish.
Once the cost is set out, ask yourself: is the client comfortable with it and can they genuinely appreciate the value of what is being delivered?
As a test, think what your clients might say about you when they meet friends or family following their meeting with you. Are they strong advocates and if so what are they strong advocates of?
Once the process is embedded and the whole team has the skills and understanding, the route map for the client becomes clear. Not only will they enjoy the experience, but they will also happily pay fees and become advocates of the process, referring others into the bargain.
It is a great model and well worth paying for.