I have long predicted that following the RDR the advice market will polarise into a professional sector dominated by small and medium sized firms and a commercial sector of larger firms that will be restricted in practice if not in name.
Adviser charging is in essence an attempt to force commercial enterprises to adopt professional standards. As such it will fail. Those running advice firms as commercial enterprises will find ways round the rules so that they can place their own interests ahead of their customers. That is what commercial enterprises do, while professional firms place their clients’ interests first. This is well attested to in respect of culture, regulation and practice.
Ideally, if the FCA can see the wood from the trees, the term ‘independent’ would soon be confined to firms meeting professional standards. Bodies like the PFS and IFP could become professional bodies who chuck out members who do not cut the mustard.
Well, we can hope. In the meantime, those of us running aspiringly professional firms need to demonstrate that we are charging clients in a consistent and fair way. The old basis of percentages of investable sums clearly does not do this. It never did. Its aim was to permit advice firms to make egregiously large profits from wealthier clients which cross-subsidised services to less wealthy clients.
When establishing FiveWays Financial Planning last March, my fellow directors and I agreed to adopt a basis of monetary fees for initial advice. We published a fee band schedule on our websiteand give this to prospective clients at the first meeting. At the end of this meeting we are usually in a position to tell them which band their advice fee will fall into. There are five bands starting at £250 to £500 and ending at £4,000 to £8,000.
The bands are based on experience of the amount of work necessary for typical cases. We assess the case in detail once we are working on it and that determines the precise fee chargeable.
We initially tested the fee band notion with our professional connections. They love it. It is in line with the way they operate. They know it is not always possible to predict the actual time that will be taken on a case, which means that if you quote fixed fees at the outset, you have to set them at a level high enough to allow for this, the result being a tendency to overcharge.
Our fee listed in the fee band schedule is our fee. There are no additional fees for implementation, admin, research or whatever. Everyone knows that as customers we dislike having to grimble over a complicated schedule to try and work out what we will pay. Our clients like this simplicity.
Our ongoing service fees are percentage-based on the value of assets on which we advise. In this case, there is a rough equivalence between size of assets and costs of service delivery, especially in terms of adviser time – richer clients usually need and get more of it. We tell them this and they understand.
Our business plan and the P&l show that we do make a profit, yet we know our fees are lower than those of many other firms. We are ready for transparency and consumer comparisons.
Chris Gilchrist is a director of FiveWays Financial Planning.