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With the introduction of adviser charging the subject of fees is very much at the forefront of everyone’s mind. With the banks and large nationals publishing their post RDR fee structures in recent weeks advisers must seriously consider how they position fees with their clients.
Ignoring platform and fund charges there are typically three separate adviser fees now being charged; these being an initial advice fee, a product / implementation fee and an ongoing servicing fee.
The initial fee, where charged, is probably the one that will cause the most issues as this will normally result in a client having to write a cheque for the advice; something they may not have been used to doing in the past.
The biggest issue here, however, is deciding how much to charge and then being able to justify it.
What are we actually charging our clients for?
Is it for the value we add in the advice we give, is it for our expertise, is it for the risk we take on board, is it for profit or is it a combination of some or all of these?
The clarity of message in the mind of the adviser is crucial and they must be able to articulate it if they are to introduce fee charging successfully into their business.
Some firms work on an hourly basis which is probably the simplest way to do it, but how does this incorporate value and don’t clients like to work to a known quantum?
The product / implementation fee, where charged, is perhaps the most interesting element of adviser charging as this tends to be the largest of all the fees, but potentially where the least value lies in the eyes of the client.
Historically our fees have always been generated through this part of the advice process as this is where commission was generated.
Whilst commission has now gone (with the exception of protection policies) the majority of adviser charging will remain focussed in this area as this forms the basis of our regulatory costs.
FSA fees, Financial Services Compensation Schemes levies, Professional Indemnity Insurance premiums and other regulatory fees are all based on how much our clients invest in products.
We are therefore left in a situation where the fees we charge focus on where the costs to our business lie rather than on where the client sees the value.
A client will place more importance on the steps they need to take to achieve their objectives (i.e. the advice) than they will on the solution itself (i.e. the product).
Post RDR not all products will allow this element of adviser charging to be taken from the product which somewhat pushes the fee conversation and how the adviser will get paid to the forefront of the conversations.
The ongoing servicing fee, where charged, is possibly the simplest to explain as it normally represents a percentage of funds under management and is taken from the associated product.
The key is again being able to articulate what the client receives in return for this fee. Is the fee for investment management, is it for ongoing advice, is it for regulatory fees, is it for profit or is it a combination of some or all of these?
As per the initial advice fee advisers must have perfect clarity of this in their minds and be able to articulate it if they are to charge clients on an ongoing basis.
The final thing to consider is that it is surely only a matter of time until the debate resumes over allowing commission to be paid on protection policies, but that is perhaps a subject for another day.