He adds that this fee model also means that smaller investors receive a better deal than larger investors, which will inhibit advisers from migrating to the higher end of the market. The logic is difficult to argue against but there are more fundamental reasons why advisers should be looking at alternative fee structures.
If, as we are told, only 13 per cent of investors are willing to pay ongoing fees but 40 per cent are willing to pay task fees (source: Winning Propositions: The Consumer Market Post-RDR published by JP Morgan), then there is a market for advice that is largely untapped. Task fees and hourly fees are not being commonly used yet by advisers and represent a means of expanding into different advice markets.
It is worth looking back to the reasons why ‘three plus a half’ came about as such a popular model. Twenty years ago almost all advice was paid for by initial commission from product providers. While this provided higher initial remuneration (5 per cent to 6 per cent was not uncommon and higher rates than this were negotiated on some products) it did nothing to add to the embedded value of the adviser business.
Increasingly advisers became concerned with their exit strategies and the move to ongoing trail commission was a big part of establishing the exit value of their business. In turn this drove adviser business models towards acquiring and retaining more capital-rich clients. With this change came a greater focus on the service part of the proposition as advisers sought to demonstrate value to their clients post engagement to cement client retention.
Adopt
With the changes brought about by RDR advisers have sought to adopt fee-charging models which are mirrors of the old commission model. It is not the first time we have seen a reaction to regulatory change that followed the line of least resistance. This time, however, such an approach may not provide a long-lasting solution. Trail fees paid by providers are under threat from a variety of angles including regulatory and provider pressure. Fund switches between investment wrappers will halt the trail payment and require any new fee to be agreed under the adviser charging rules. Rebates from platforms are to cease and Sipps are under the spotlight. Aegon hit the news after it appeared to have cancelled trail payments in response to a lack of activity for three years on a client’s account. Future dependency by advisers on trail fees to bolster the value of their businesses may be misplaced. The multiples being applied to value adviser businesses will need to take account of these threats.
With an uncertain future for trail fees it may be time to revisit the business model at a fundamental level. The ‘three plus a half’ model has driven adviser behaviours towards offering a ‘review/plan/advise/implementation’ service followed by post-engagement reviews.
In turn this places most of the advice proposition at the point of engagement with the ongoing work more focused on administration and communication. It is this that has caused so much adviser angst in defining propositions under adviser charging: how do you prove your worth to a client based on service and administration?
Advisers have seen their value being offered in both advice and service. Service is a difficult proposition to explain and quantify in value terms. Advice on the other hand is much easier to demonstrate in terms of added value. By making advice the core proposition of the advisory business the focus becomes set on looking to maximise advice opportunities.
There are two main drivers for advice opportunities: frequency and value, and they are not mutually exclusive. There is a need to move to thinking in terms of the worth of advice to clients rather than the size of their liquid asset base. For example advisers may have found clients who are income rich with high levels of wealth but in highly illiquid assets as unattractive and unsuited to their remuneration model.
In the post-RDR world these and other clients represent a new market for many advisers and one which is three times the size of that willing to pay ongoing trail fees. The challenge is to engage with these clients without focusing on their investable wealth but instead focusing on the frequency and value of advice they will require.
There are many ways to offer advice-value to a client. It may include the following:
* Tax planning by helping the client to look at using his annual allowance and exemptions.
* Developing a financial plan to achieve the correct level of liquidity to match the client’s future aspirations.
* Assisting with commercial mortgages or buy-to-lets by writing reports for submissions to potential lenders.
* Engaging with other family members on matters such as estate planning or lifetime planning for nursing home fees.
Challenging asset bias is hugely valuable to a client who is heavily overweight in residential property (as many are). By moving away from a product/investment/asset mindset it is possible to identify numerous areas of task-fee advice.
Trusts are an area that have been underutilised in financial planning for a very long time. They are not only for tax mitigation; they provide asset protection and peace of mind. Traditional trust companies have charged handsomely for their use, both at set up and annually. It is an area of opportunity for advisers to add significant value in the client relationship and provides potential for high-value fee charging. With the minimum examination standards set where they are it is surprising that more advisers are not using their new found knowledge to greater economic effect.
Referrals
The clients will include existing clients, but there are possibilities to extend into new referrals from professional connections and new client acquisition strategies. This in turn means revising the proposition and redefining it to explain how advice adds value in task-driven situations. It requires a development beyond the ‘review/plan/advise/implementation’ to adding a single or repeat engagement of review/advise. It means moving away from a post-engagement service proposition to a repeat advice engagement proposition.
Any change is uncomfortable and particularly when it involves trying something completely different. There is unquestionably a need for advice that extends beyond asset management but it requires a change of approach from advisers. Both they and their clients will be the beneficiaries.
“The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking” – Albert Einstein
Richard Leeson is director of D&W Management Consulting
Key points
The concept of ‘three plus a half’ being doomed as a fee charging model has been particularly difficult for advisers to accept
With the changes brought about by RDR advisers have sought to adopt fee-charging models which are mirrors of the old commission model
There are two main drivers for advice opportunities: frequency and value, and they are not mutually exclusive
