RDR Rubbish

Hourly fee rates will not work with 98% of the population. Hence they will have to access to a whole of market distributor. And in turn even less long term savings will take place, god forbid we have very few people saving now! The FSA are in F-Pack planet with the rest of the rule makers and MPs. We have the wrong people deciding important issues on the behalf of the public. What's new?

Posted by: Incompetent Regulators Awards Team

RDR Rubbish

Hourly fee rates will not work with 98% of the population. Hence they will have NO access to a whole of market distributor. And in turn even less long term savings will take place, god forbid we have very few people saving now! The FSA are in F-Pack planet with the rest of the rule makers and MPs. We have the wrong people deciding important issues on the behalf of the public. What's new?

Posted by: Incompetent Regulators Awards Team

RDR

It is interesting how the FSA has intrpretted its remitt. Every other regulator seems to regulate the price of a product or service not the shape of how that price is achieved. The FSA is now acting as market maker rather than market regulator in seeking to stipulate how remuneratioan is achieved. If they padi as much attneion to howthan bankis were accountgin which posed and coniontues toi posoie aseriusou market risk for peopo to lose real money ratehr than hwo advisers are paid whihcposes very limited risk adn even then over rlatiively modest amounts the cvountry woud be in a far better place. The FSA has no concept of either reality or risk...

Posted by: Simon Webster

fees.

We are now in a position to tell the FSA and others"we told you so" Research done years ago showed that the majority of the general public will not pay fees or if they do on a limited basis. All the money spent on driving down this dream world that given the choice of paying a fee or suing the money for other purposes e.g. holidays people will opt for the latter. They are quite happy paying a fee on the "drip" which is basically what commission is. Can someone wake up and drink the coffee before it all becomes a joke and people stop saving or protecting themselves.

Posted by: terry

RDR

It is interesting how the FSA has intrpretted its remitt. Every other regulator seems to regulate the price of a product or service not the shape of how that price is achieved. The FSA is now acting as market maker rather than market regulator in seeking to stipulate how remuneratioan is achieved. If they paid as much attention to how the banks were accounting which posed and continues to pose a serious market risk for people to lose real money rather than how advisers are remunerated which poses very limited risk and even then over relatively modest amounts - the country would be in a far better place. The FSA has no concept of either reality or risk...

Posted by: Simon Webster

Geting paid

As I see it the real issue with CAR or what ever it is finally called is this: It would be fine if the middle market what ever that is understood the value and accepted the cost of advice (and I fully accept that it is our responsibility to get our message across) but I in my experience we are far from that and there is too much vested interest, power and money from the direct distributors (advised or non advised) behind keeping the value of our service hidden from the general public view. For it to become widely accepted unless someone with more power and a greater vested interest i.e. the Gov’t and any of their agencies direct or at arms length (FSA) force the issue it will remain thus. I can just visualise they conversation with prospective clients for example, for simple regular investment pension advice. When you get down to the nitty-gritty it could go something like this: Adviser (ME and I am sure some folks are willing to do it for less): My fee for this advice is £1200.00 Client: (Gulp) how much! Adviser: Mr or Mrs Client I am sure you would like a professional and impartial advice where you have recourse to compensation if it is wrong, on the best course of action for you. This has an implicit cost and based on our conversation I can tell you exactly what to you need to do, but due to the regulations, which are rightfully put in place to protect you (and me) the cost to me for putting may name to the advice including preparing all the documents, evidence of research etc and processing work the cost is what it is. But don’t worry if you take up my advice you do not have to pay me directly I can agree with the pension provider I use to take my fee form your investment contributions in to your pension plan. Client: What happens if I decide not to take up your advice? Adviser: I will send you an invoice for my fee and if you do not pay up I will sue. Client: Oh. Ok, but if I do take up your advice I can only afford to invest £80 per month therefore how do I pay your fee via the pension plan provider? Adviser: Ah! If you add on the tax relief the pension provider will claim back form HMRC on your behalf you are actually investing £100 per month. Therefore you will have paid my fee in the first year. Client: But how much will I have invested in my pension plan after the first year. Adviser: Nothing, and by the way if you stop you contributions before the year is up I will send you an invoice for the balance of my fee. Client: Oh. Adviser: Alternatively you can pay my fee out of you own pocket (subject to a credit check by me to make sure you are good for it) or I can arrange a loan (subject to all the right permissions being in place) to cover the cost of my advice. Adviser: shall we get started then? Client: I would like to think about it. Going to be fun is it not. I for one will be very reluctant to wait more than a year if that for my money for the work I have done. At best for those who do not have the means to write out a cheque for £xxxx we are going to return to the “good old days” of front end loading (but this time clients will not be able to claim they did not know because we will have all got them to sign in blood with the Great Great Grandparents present to say they do for what good it may do us) before we lift a finger. At worst we will end up with the very target market who the state need to get off their backs doing nothing or buying something on line (with no protection and no real idea for what they have) or from some snake oil salesman. Happy days

Posted by: Stuart Rathbone

Overall I say GOOD

The comment is however somewhat simplistic. We work on a model where we quote 3% initial and 0.5% ongoing to clients currently, but are moving over to segmentation of Clients (ongoing service) who pay a monthly retainer and customers (transactional and hence we think higher risk)who do not pay for an ongoing service. Our base will probably remain in the region of 3%, but we have a minimum we believe is cost effective for our work in each product line which we quote so tehre is a pivotal point and it MAY mean the actual % is more than 3%, surely that is good business practice just as discounting down from 3% for larger transactions is fair?

Posted by: Phil Castle

Same old rubbish rants

I'm in agreement with Adam Young mentioned in the article, and the comments so far posted on this item are a testament to the fact that too many people just trot out the same old rant about the FSA this and the FSA that, or fees don't work and 98% of people won't pay fees (where did that number come from exactly - made up on the spot probably). To my knowledge the FSA haven't said you must charge hourly rates, nor have they said you must have fixed fees - they do seemt o eb saying that commission is out, any form of indemnity is out, and that fees are in, but how those fees are structured is seemingly up to the firm, not the FSA. So whilst the FSA may be criticised for many many things, let's try and keep things reasonably on track, and keep the debate on the matter in hand, in this instance the assertion by 2Plan that clients will not pay anything other than a percentage of the investment (well they did say most clients - to be fair). Some clients will pay hourly rates, and we operate an hourly rate and a fixed fee rate for the financial planning work we do, before we get to any investment related work. Those fee structures work very well for the work that we do. I am however shifting my views somewhat that investment related work tends to suit a percentage fee model better than the current flat fee we operate. This is after some 3 years of working on flat fees/hourly fees for all aspects of our work, and finding some difficulty/problems by not adopting percentage of assets model. Funnily enough the problems are les to do with the client not being prepared to pay (they do), and more to do with us not being able to price it properly/accurately in the first place. Somewhat surprised to find that a large proportion of advisers have made little headway with this, there'll be tears at bedtime.

Posted by: Dennis Hall

More than 3%!!!

What sort of adviser expects to receive more than 3% as an initial fee? We have charged a maximum of 1% for several years and 0% in many cases, especially for existing clients who are adding to their ISA each year. Most of our income comes from 0.5% trail/servicing fee (call it what you like), which these short sighted advisers will have to get used to if they are going to stay in the industry.

Posted by: Daniel Wackett

Can we turn the record over...

The public wont pay fees will they? Do me a favour... 100% of my clients are members of the general public and guess what - they all pay fees. Not pseudo commission 3% upfront and 0.5% pa fees either. But Time charges or project fees for advice, implementation fees for purchasing products (based on a menu) and flexible options for review services(ranging from 100% time fees at one end to 1%pa with full offset against time fees at the other). Whats more we've been 100% fee only since early 2005. The problem with fees is not the public it's advisers: more specifically their remuneration expectations. To state that hourly fees will not work with 98% of the public is naive at best and just plain wrong at worst. If that is the case how are there any Solicitors or Accountants still in business? The truth is that people will not pay for things they do not value. It's the advisers job to demonstrate where they can add value and for the client to carry out the cost-benefit analysis. The public perceive financial advice to be free. Even though they have never been told that they are actually paying for it. Perhaps the reason why the public are unwilling to pay for advice is because they don't value it. Ask yourself this question: If you had £500,000 to invest would you use yourself and would you be happy to pay your fees? If you answered yes you're probably already a fee adviser...

Posted by: HRJ

Response to "More than 3%!!!"

Daniel asks who on earth would charge 3% or more, as he only charges 1% or even 0%? Where does Daniel suppose new advisers will ever come from in our industry? Anyone starting out, who does not have the luxury of a large client bank which already delivers enough 0.5%'s to run their business, needs to charge sufficient fee up front to cover the cost of their meeting. The average age of IFA's will simply increase, as no one will ever afford to set up from scratch ever again, with no commissions from pensions, life policies etc. Did Daniel never take up front indemnity commissions before his business became mature enough to run his current model? HAs he ALWAYS taken 1% or less? I very much doubt it. Our industry will eventually end up in the hands of a few large conglomerates who can buy sufficient fund based income to pay their staff. There may be trouble ahead, but while there's moonlight etc........

Posted by: Dave

who is driving this?

I'm not sure why the regulator is driving the market into a blinkered adviser model that only 15% of advisers use. Surely if the public wanted fee based advice they would take their business to fee-based advisers and commission advisers would have already went out of business? I'm all for a free market and giving clients as much choice as possible about how they want to pay for our service. Surely the most important thing for the profession is the quality of advice and ensuring clients actually know how much they are paying? I can't imagine that a new invester putting away £5,000 would receive any sort of quality advice for 1%. These debates remind me of a macintosh vs PCs flavour war, except the FSA has plumbed for the erradication of the most popular platform.

Posted by: Mark Green

To Daniel Wackett - It's CAR

Everythinbg we do is customer agreed remuneration. The FSA does not mind and nor do clients whether that is fixed fee, hourly rate or a % of the sum being invested or maintained and advised on. Just becuase I (Like many others) say we work on a model based on 3% plus 0.5% does not mean that is what is charged or agreed with a client. It may be a fixed fee, it may be an hourly rate (but as Dennis has said, he has found problems with hourly rate) or it may be a % with a base (in this case 3%) which as a small firm, we can truly negotiate with the client on a customer AGREED remuneration basis. If we think the work will exceed 3%, we may have a minimum fee and it is up to the client to negotiate us down from that, if they don't, then that I am afraid is what one calls profit..... we are in business to make a living (as well as help people) As a good example to you Daniel, what would you charge for advice and implementation of a totally new client who came asking for advice about taking their £3,000 pension? 1.5% (£45), which is about average commission on an annuity 3% (£90) or is it better to set a minimum for advice on annuities so people realises sometimes the cost of advice (and risk the adviser would have to take) WILL outweigh ANY potential benefit of taking advice. We've set our minimums at a level to give a great big hint to potential new clients of when they may be better just basing a decision on the information in front of them.

Posted by: Phil Castle

Commission by results

I know this is off the wall Lets all get paid on results if the funds go down you get zero commission if the funds increase you receive a percentage of the growth. This would apply to fund management fees as well. So if you advise a client about a dud fund why should he have to pay for your duff advice, I can hear the sighs now of it was a bad year, ok. so wait for a good year then you get paid. LETS STOP THE GRAVY TRAIN, the FSA should consider in their renumeration model. I think this will concentrate the mind SIMPLES

Posted by: David Peters

Insights from setting flat fees

No Monkey Business (5 years old) has only ever charged flat fees for financial planning (about 5% of revenues is consulting work that does not lead on to a portfolio role and 20% that does) and even for the 75% that comes from portfolio mandates (mostly discretionary but some advisory). Note, btw, from this split that we do regard our work (and therefore our charges) as being front-end loaded! There are two important observations I would offer. Flat fees can still be set so that the value experienced by the client relates to some extent to their own wealth levels but is nonetheless stable over time. A purpose is to remove the biases based on clients' changing risk and asset preferences. But you also then avoid importing market volatility into your business model. It is striking that the same advisers who know not to recommend equities where clients' utility is largely defined by sensitivity to volatility then make their own business inappropriately risky by attaching asset-based fees, as though they had no cost/profit sensitivity to income variance and could ride with impunity the very long-term equity trend! The second insight is that asset-based fees work as a subsidy by wealthier investors of less wealthy. At the level of product charges, this structural cross subsidy probably has a value to society and that is perhaps why it is tolerated. I am not convinced, as it is the complete opposite of what operates in deposit markets. For advisers, the subsidy effects on their business and revenue model are specific to each and they need to understand them. For any transaction or service you can work out the subsidy effects by reference to estimates of unit costs. Your client and business mix will then give you the profile of subsidy effects. Advisers may want to operate cross subsidies within their own client book if it means they would otherwise lose more revenues from smaller clients than they can gain from flatter charges at the top of their business. This might be because they think that at the top end a better value proposition might not actually be valued (we certainly found that 'cost-plus' - as in hourly rates - gives far too much of the percived value away yet does not lead the rich to beat your door down. Or it might be that an adviser does not know how to market a better value proposition at the top end (the Pareto principle of 80:20 often operates serendipitously - random personal contacts - rather than as the product of deliberate segmented marketing). I strongly advise you to discount observations from other businesses that the price consumers will pay is fixed, let alone fixed in relation to something in particular. The chances are they do not have a strong business case for changing their model because of their own dependency on the subsidy effects or because they do not understand the increase in business risk from asset-based charges or they do and it does not threaten their survival (we do not all have the liquidity and capital access of HL or TL). Your business case is unlikely to be the same. It is probably also sensible to assume that the RDR adoption process will itself feed through to consumer thinking, prompted in part by media coverage of different business approaches.

Posted by: Stuart Fowler

Hourly fees

Some IFAs are putting the concept of hourly costed fees forward as the panacea of how to charge for financial advice, as this is how lawyers and accountants work. I head a department within a law firm and I can tell you most firms of accountants have moved away from hourly rates to fixed fees and lawyers are moving in the same direction. Hourly rate is the bane of most lawyers existence, they are just not sure how to change. I recently attended a DVD produced by Central Law Training suggesting that lawyers move away from this method of charging or get left behind. Indeed some companies are excluding from tenders law firms who don't charge a fixed rate. Clients want transparency and to know where they are. Either a fixed fee or percentage clearly stated and agreed with the client offers this. It also rewards efficiency, which an hourly charge does not. By all means have an hourly rate for those few times when it applies, but I don't hold with those "holier than thou advisers" who look down their nose at others, who don't do it by the hour.

Posted by: Simon Ludden

Where does Brett invest?

My calculator suggests a return, net of all annual management charges, of 0.0000068 per annum to recoup charges of 7% over that period. I really think we should try and do better than that: wouldn't the client be better off in cash?

Posted by: Patient investor

A percentage Fee??

How can anyone express a fee as a percentage of money invested, it is no different to a commission, but applied by the adviser and not the provider. It does however deter advisers from taking higher commission offers from providers, but a percentage charge is a percentage charge, commission by any other name is still commission What we all need to do is re - examine our way of working, set up a system of time management and costings now as a sort of time and motion study so that we can clearly ascertain how much we will have to charge for each task, based on how long it is going to take, that way, we can present a menu of fee charges for each element of advice, fact finding, product research, reports and recommendations, implementation of product purchases and an element for profit (without which none of us stay in business. My basic model on which I am going to operate is as follows (which I hope will help my industry colleagues in their hour of need) 1. Initial discussion (1hr) free 2. Data gathering and input to your computer software system (fact find) (3hrs ) 3. Analysis of Info obtained and identifying needs (2hrs) 4. report and Recommendations (Up to 7hrs) includes product research and compiling the recommendations 5. Presenting solutions and processing transactions (up to 4hrs per transaction) 6. ongoing annual service charges (4 hrs per annum depending on volume of business obtained) 7. Cost of regulation and head office retention 25% of all fees charged) 8. Cost of PII (divided by 52 weeks) then divided by number of hours per case. Does that help anyone ? It is just the basis of my research for hard costing in future, but it is turning out to be fairly accurate.

Posted by: Ned Naylor