Facing up to price-sensitive clients

Paul Harrison, head of business consultancy at Prudential, explains how having a clear and open remuneration model can improve the efficiency of your business.

For many adviser firms, the RDR focus on adviser charging is causing sleepless nights. Although many advisers are understandably worried about the challenge to sales processes, business cash-flows and client interaction, the prevailing fear is that clients will become more price-sensitive to the services provided by financial advisers and possibly less inclined to pay for their expertise.

However, these changes also represent a significant opportunity. In implementing a new remuneration model, advisers can improve business efficiency by:

• Ensuring that they are paid for everything that they do.

• Having a full understanding of the cost base and profit margin.

• Ensuring that clients know precisely what advisers do for them, and its value.

Having a structured approach to developing a profitable charging structure will require focus, determination and time.

If committed to, the rewards will help to secure the long-term profitability of the business. In addition, a clear separation of the cost of advice, service and product charges should make it easier to compare products and measure value for money.

Having a clear process to follow is an integral part of navigating key business changes. In order to ensure a smooth transition, advisers will need to: understand their hourly rates; the costs associated with delivering initial advice versus the cost of delivering an ongoing service; ensure there is a system in place to bill for any ancillary services; and implement the new charging structure for all clients.

Hourly rates

Even if advisers are not operating a model where clients are charged by the hour, thinking in terms of hourly rates will help to ensure the service provided is costed profitably.

Taking target annual income plus overhead costs and adding in a suitable profit margin is one way of calculating an hourly rate. The total can then be divided by the adviser’s total ‘billable’ hours available per year.

As part of this calculation, advisers should consider, realistically, the number of weeks and billable hours per week that can be spent on client activities.

It is unlikely that a one size charging structure will fit all, so it is important to think about the approach that will work profitably for the majority of clients.

Historically, many firms have operated on a cross subsidy basis. However, in future many models will be more closely aligned to that of other professional services firms, where they will know an individual client’s level of profitability.