In the run-up to RDR, intermediaries are finally starting to get their heads around the Adviser Charging thing. The received wisdom says that this is mainly about moving from a front-end sales emphasis to an ongoing service emphasis, and reflecting this with a parallel emphasis-shift from front-end to annual charge (either a flat rate or a percentage of the portfolio value).
The thing is, I have a nasty feeling the received wisdom may be wrong – or, if right, then only right for a couple of years.
To make my point, who shall I choose as an example of a Typical IFA Client? Ah yes, I know, me. Around three years ago I moved to a fee-based IFA who signed me up on just this kind of basis. In the first year of our relationship, when he was kept extremely busy shifting things around and moving my various pensions into a SIPP and so forth, that service fee seemed pretty good value. But in the subsequent two years, it’s seemed like very bad value indeed. Basically, the sum total of what he has done for his several-thousand pounds this year is….nothing.
No criticism, or not much, and no disrespect. I don’t suppose there’s very much that has needed doing. It hasn’t been a very special year – no big lumps of new money to invest, no need to realise any cash, no compelling reason to move any money from one place to another. In one or two respects he could probably have tried a bit harder. (Did I get any communication about using my ISA allowance, I wonder? If so, I don’t think it was any more than a standard all-client letter.) But equally, I’m pleased and relieved that he hasn’t embarked on a frantic programme of fee-justification involving lots of unnecessary churn and hours of pointless discussion about scary tax-avoidance dodges.
No big surprise that I shall be speaking to him shortly to suggest that much as I’m keen to continue to maintain our relationship, I’m thinking it would probably make more sense to pay for his time when I need it rather than pay an annual fee whether I need it or not.
I suppose this will be a little disappointing from his point of view, but I think the conversation will have a wider significance.
Behind that received wisdom about how adviser charging is going to work, I think there’s an implicit assumption that provided IFAs do indeed change their ways and provide a much higher level of ongoing service, the amount of revenue that can reasonably be generated from adviser charges will be at least as much – if not more – than can be generated from initial and trail commission.
Increasingly, I just don’t think that’s true. Most of us, in most years, don’t really need a whole lot of ongoing advice and service. Yes, there are clearly exceptional years, almost always life-event-related, when the need for advice peaks sharply. But in between, there can often be period of several years in which there is little or nothing for our IFAs to do.
I know from many years of my own experience in marketing services that when the workload is peaky and troughy, friction invariably results when the remuneration is on a retainer basis. Someone’s always feeling pissed off, or more accurately ripped off – and the argument that it’ll all come out in the wash over the long term, say a decade or so, doesn’t help very much. Retainers, or other forms of fixed fee, only work when the workload is reasonably consistent. When it isn’t, the only option is to move to project fees which are matched to the workload much more closely.
I think that IFAs are so keen to think of adviser charges as a new name, and a new format, for something which will actually work very much like trail commission that they’re failing to recognise and understand this crucial difference.
If I’m right – and if my own experience is typical – then in a couple of years they’ll find a distressingly large number of their clients helping them to do so.