How we transitioned to an adviser charging model

Advisory firms have less than two years to transition to an adviser charging remuneration model. But some have already made the move...

Martin Bamford, managing director, Informed Choice

"We made the move from commission to adviser charging in 2004 as a result of a growing sense of frustration within the business. This frustration came from our old pricing model where we only got paid if the client purchased a commission-paying product. With so much of the ‘value’ we were providing being received by our clients regardless of whether a product was purchased, it seemed a bizarre way of structuring our remuneration.

"We made the move by pricing our services at three specific points in the process – advice, implementation and review. About a year later, we added an engagement stage at the start of this process. For advice, we decided to charge a fixed project fee; the amount of this fee depending on the value, expertise, risk and profit associated with the exercise. We charged a percentage of assets for implementation and review.

"Our charges are disclosed to all clients at a very early stage on our website, in our marketing material and in our client agreement letter. Following the first meeting with a new client (which is at our expense and without obligation), we write to them with an engagement letter detailing the specific charges for the services they require. Once they sign and return a copy, we get started.

"We are very flexible about how our charges are paid: whether this is a cheque from the client, through commission offset or fees deducted directly from an investment account on a wrap platform. What matters is that the client knows the level of these charges from outset, understands what they are getting in return for the charges and sees they represent good value.

"We made several mistakes in the transition. We started by charging too little for advice, which put off some clients who could not see the value in paying small advice fees. We experimented with tiered implementation fees based on the amount invested. We also had no consistent methodology for calculating advice fees across the firm, although this was quickly resolved by creating an advice fee calculation package.

"Moving to this charging basis has transformed our business. It means that every activity is now profitable on a standalone basis. Working like this for over six years puts us in a very strong position ahead of RDR, because we already have the confidence to charge for our services and the time has been spent working out the kinks ­associated with this system."

Peter McGahan, managing director, Worldwide Financial Planning

"We moved to a fee structure in 2006 when we moved to managing assets via a wrap. It was clear that commission was spaghetti-tied to charges: the confusion suited excess charging and disguised hidden charges via both simple and complex products, with investments such as investment bonds carrying mirror fund charges for example.

"This sat uneasily with our integrity. If you believe something is not consumer bene­fiting then it cannot last and if change is inevitable then the earlier the better. We firmly believe commission is too much of a temptation for churn and so we needed it altered. We sat down together, decided what the change would look like and agreed a way forward.

"Customers are pretty unaware of charges. Customers care about ‘value’ and any adviser moving to a fee structure will have to be very clear about what this value actually looks like.

"Perhaps the biggest threat is in the mind of the IFA. If they are not confident about the value they add they will struggle with the communication of benefits and their fees will look unappealing.

"If your proposition is unique you will attract different customers. For example, we as a company have a very clear, specific and successful investment process. It is unique and is a clear value-add however, it is expensive; customers may simply want timely contact twice a year with an adviser who will keep their affairs up to date with tax changes.

"We are not competing with each other; we are competing with customer apathy. A clearly defined value-add with a clear charging structure will be accepted by most. The fee structure should be appropriate for the task and should treat customers fairly.

"We prefer an hourly rate which varies depending on the complexity of the case. Whilst we might begin at £150 per hour as a schedule, the reality is less. We place a value on our investment process and would have a minimum fee for a full investment review.

"My best advice would be to brainstorm what value your firm really has. Think about your family receiving advice when you are not there: what would you worry about? This will lead you to your value. When you have extensively listed what you do, you are at the brink of prepping your value proposition and a fee schedule which cannot be challenged because of its ­transparency.

Steven Martin, managing director, Smart Financial Planning

"I made the move to adviser charging in 2003, but rather than for all the reasons that you are supposed to, I did so for a purely for a selfish one.

"I was involved in an extensive piece of inheritance tax and tax planning work for a chap in his late seventies. We had put hours and hours of work in, written all our recommendations, travelled to see him half a dozen times – until his son became involved and decided he did not need to use us.

"We had given all of our work, effort and time for nothing. Furthermore, the advice we had given was completely implementable and, within reason, he could have gone online, searched for the products and bought them. I decided that I would never let it happen again. If I’m going to advise people, then that is the magic, and I need to make sure I’m paid for it.

"Our structure is very simply split into three parts: planning, implementation and review. We charge for each of them in the same way: 1% of assets (excluding property) for each stage.

"In terms of client segmentation, we do this at the door. We only take on clients with a minimum recurrent fee of £5,000 a year, so with assets (excluding property) of over £500,000. Not every client is prepared to pay the fee but that is ok.

"Because of the way that our business has been built, we can afford to put our stake in the ground and say that this is what we do, this is how we do it, here is what it will cost. If that does not work for a client, then there are lots of other people who will do something different.

"My advice would be first and foremost: whether you think it is right or not, whether you think it is fair or not, whether you think it is reasonable or not, I would implore you to accept it and start to work out how to move forward with it.

"From a practical point of view, I would suggest sitting down and working out the value in your business. Ask your clients. I guarantee they will list your relationship, your trust and the fact they know they are being looked after high at the top. By not charging you are actually doing yourself a disservice.

"Finally, if your proposition is flawless but you find you are not getting the clients, you need to look at your communication. It may not be the principle that is wrong but how you deliver it instead."