Andrew Tully goes through the important considerations of developing a fee schedule
After what seems an interminable wait, the Retail Distribution Review is finally with us. The focus for many advisers during 2012 will have been ensuring they are suitably qualified for the new world. But they also need to consider how, and how much, to charge customers.
So for those who have not done this before, how should a fee schedule be put together?
Before we get into the detail we should recognise that this is a fundamentally different position for some advisers. Discussions about fees should happen at the beginning of the advice process, and this could lead to difficult conversations if an adviser is not able to communicate the services they will provide in return for their fee. So being able to articulate the many benefits advice brings is crucial.
It is also important to move the focus from the product transaction. The real benefit advisers bring is the advice leading up to any transaction, considering all options and ensuring individual circumstances are taken into account. For example, finding who offers the best annuity rate is the simplest aspect of retirement advice.
Deciding the appropriate retirement income product and shape of income is the difficult part, and the area where advisers really add value.
How to charge
When it comes to deciding how to charge there are three main options - basing a fee on hourly rates, a fixed amount, or a percentage of your client's investment.
For businesses that have been used to taking commission, the most obvious route may be a move to a percentage basis where the fee automatically reflects the size of the case.
However this may not work for smaller cases where the percentage fee doesn't meet the adviser's fixed costs. It may also be difficult to justify to clients with larger pots - it is unlikely to take double the work to advise on a pension pot twice as large.
A time-based system would bring advisers into line with other professions such as accountants and solicitors, but it can lead to undesirable consequences and detailed monitoring is required to correctly allocate time against customers.
A fixed fee may be the most attractive method for many customers as it gives them certainty on cost. But from the adviser's point of view it could cause difficulty as the fee needs to be agreed at outset, often before many of the complexities of a particular case have been established.
With each option having its own pros and cons, a willingness to use all three, depending on circumstances, or even a combination for a particular client may work best.
Considering how much to charge is another area which will be new to some advisers. There are two obvious ways to work out a realistic amount.
The first is to look internally and consider fixed and variable costs plus the profit objectives, and express these as a percentage, fixed fee or hourly charge based on the estimated volume of business. This should work assuming the anticipated volume of business is achieved. However it does not take account of what competitors may be charging.
The other option is to look externally and determine how much to charge to remain competitive. It's always good to start with the customer and, ultimately, how much customers are willing to pay determines how much you can charge.
In some situations, research may suggest the fees the adviser believes they need to charge are higher than their competitors'. This may be acceptable if the adviser can demonstrate why the service they offer is superior.
Others may want to identify where they may be able to reduce or eliminate costs without undermining revenue. Or, alternatively, consider if it is possible to take on more clients without adding costs, or increase chargeable time by making more use of technology.
While much of this may seem obvious, it's important advisers understand how much it costs to advise on a particular piece of business. And turning clients away in some situations will be as important as working out how much to charge.
While most companies want, and need, to push on and secure more business, taking time now to ensure there is logic to the way you charge and how much you charge will give your business a firm foundation to grow in the future.
Andrew Tully is pensions technical director at MGM Advantage
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