Blog: Moving to the fee-only model

Joel Adams, joint-CEO of lift-financial and PFS Chartered Financial Planner of the Year 2010, says we shouldn’t fear RDR changes.

There seems to be no end of stats-based stories right now about the fee-only model. Needless to say, they are not rolling out the red carpet for it. Those who still question the merits of the Retail Distribution Review (RDR) are simply clutching at straws: the principles fit squarely with client needs in the 21st century and people fighting it should take a reality check, as the RDR is here to stay.

Three years ago, we made the decision to shift to a fee-based model. It was a difficult and painful change, as we wanted clients to pay cash fees. We under-estimated the effect that the transition would have on our cashflow, which led us to learn some hard lessons quickly. In hindsight, our transition should have been more gradual but, today, we have a transparent, fee-based business that is RDR-ready.

That isn’t to say that we don’t still offer clients the choice of paying via product charges (commission). We don’t see anything wrong with the commission model, as long as it is used only to pay for the reasonable costs of the advice and is not abused. Unfortunately, commission can at imply a conflict of interest, as the adviser may be giving advice being paid for by a third party.

Evidence shows enhanced commission arrangements do influence the choice of recommended products. So clients are already paying for advice in higher product charges.

What is important is the client’s understanding of how fees will work in future: it is less about whether they need to hand over a cheque but more about transparency. Many products will still be capable of having fees paid from them. The difference is most products will be ‘factory-gate’ priced, which should remove the potential for bias in favour of higher commission-paying products.

So, the fee-based model means if a financial planner is providing sound advice and being clear with clients about charges, there should be no fear about the change to fees. For us, fees have broken the link between financial products and the advice we give, while building stronger relationships with clients. From a business risk point of view, it should also mean fewer complaints.

Having a clear process and proposition in place instils the confidence to talk fees, rather than commission. Advisers then need to alter their presentation to help clients understand why a fee-based relationship is best for them and how financial products will work harder for them, as commission will not eat away at the returns.

When explained and presented properly, most clients are convinced this is the advisory relationship to have. And it is not just the high-net-worth customer: we find others lower down the income scale are happy with this arrangement.

For financial planning businesses starting to look at the RDR now, we found one of the biggest difficulties ­initially was putting together a fee and service agreement for clients. However, regrettably there is no universally agreed standard for what these agreements should look like.

In setting the level of fees, we worked backwards – from the cost of doing business and the required profit margins – to understanding what fees we needed to charge. We avoid hourly fees and base our charging structure on project and advice fees. Whatever we do, we are conscious that our fees need to reflect our intention to build long-term relationships with our clients.

With 18 months to get a proposition in place, financial planners should avoid a ‘switch-flicking’ approach the day before the RDR deadline. The bottom line is about having a service proposition and advice that is crystal clear.

So, is the RDR and the fee-only model something to be dreaded? Change is uncomfortable, not least because this change demands that existing advisers demonstrate their professional capability. However, I would predict, in ten years’ time, everyone will look back and wonder what the fuss was about. This is about improving standards for clients, and not before time.