What my IFA needs to learn from my window-cleaner

With only two exceptions, I’m pretty sure that all the companies and individuals who provide services to my family and me have one thing in common.  The way they charge means that how much I pay bears some relation to how much time they spend on us.

This is true for our cleaners, our window-cleaner, the gardener, the people who service our various cars, my hairdresser, my solicitor, my accountant, the people who clean the parquet flooring from time to time, the decorators, taxi-drivers, the dentist, Rory who fixes our domestic IT when it breaks down, Ken who keeps an eye on our place in France, Karen who feeds the cats when we’re away and all the other countless people who do things of one sort or another, from the most mundane to the most elevated, for me, my family and my household.

These people configure their charges in many different ways.  Some provide estimates for individual jobs.  Some have a fixed-price tariff.  Some, who provide regular ongoing services, charge regular ongoing amounts.  Many, of course, add on extra charges to reflect their expenses – engine oil, floor polish, amalgam, cat food.  But in every case, their core cost calculation is basically their hourly rate multiplied by the number of hours they spend.

The same, by the way, is true for me.  I give my clients time-based estimates for my projects, and I bill to estimate.  My only extra is travel expenses: my hourly rate is calculated to cover my (fairly extensive for a one-man band) overheads, which include my office, my accountant, my PI and public liability insurance and a bunch of IT and communications costs.

I said there were two exceptions.  One, on the rare occasions I deal with them, is estate agents, who charge a percentage based on the value of the house.  I don’t love this, but I can see two points in their favour:  first, they only get paid if they sell the house so they are significantly incentivised to do so, and second, the percentage basis aligns their interest with mine.  The more they get for my house, the more they make.

The other is my IFA, and indeed it seems the large majority of IFAs.  What was until recently the normal level of commission – 3% initial plus .5% renewal – is now the normal level of adviser charge.

I suppose that from the IFAs’ point of view this is all quite satisfactory, because it means the amount of their remuneration has changed very little, if at all.  What’s more, since product providers are reporting that around 97% of advisers are taking these payments from the value of the clients’ investments, through so-called provider-facilitated adviser charging, .it seems that the format or structure of their remuneration has changed little if at all either – in fact, one way and another, it’s ever so business as usual.

As I say, good for advisers.  But not at all good for clients.  I can see no possible justification for percentage-based charging.  There is little correlation, if any, between the size of clients’ portfolios and the amount of work involved in providing a good service to them.

A client with, say, a £1 million portfolio may not actually require any new advice in a particular year, but will still pay £5,000.  Vice versa, a client with a £100,000 portfolio may need a great deal of attention:  since he or she will only pay £500 that may sound like good value, but in fact what will usually happen is that the IFA will have put the client into a low-value bucket so that the amount of time on offer will be limited and the client won’t get the attention required.  Everyone loses.

There are other strange anomalies with percentage-based charging.  To mention just one obvious example, the stock market has gone up at least 10% in the last few months:  as a result, so has the money my adviser earns from me, even though he has done nothing at all to earn or deserve it.

All in all, I can see absolutely no justification for percentage-based charges, except only that they represent a nice comfortable BAU option for advisers – which, I think I can say without fear of contradiction, was not the principle intention of the RDR.

In a recent article, that wise and perceptive observer Malcolm Kerr described such charges as a “transitional” stage in the evolution of the market towards a decent professional services model.

There’s a good deal of diplomacy in that word “transitional.”  I’d prefer something like “inappropriate, unacceptable and unsustainable.”  But I think that’s what Malcolm means by “transitional”  really.

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1 thought on “What my IFA needs to learn from my window-cleaner

  1. Its certainly true that most advisers are sticking to the old conventions. But I’m not sure the half a percent is sticking – thas tending to drift to .75 or more. Of course when 3 and 0.5 came in it wasn’t to fund the cost of ongoing advice – it was just to offer a spread of remuneration so that back books might accrue some value.
    Agree entirely that work should be charged for in real money. The purpose of a percentage is make a big number small – though Wonga and their ilk are proving te opposite. The FS sector in general is overly keen to avoid real money charging and the point about revenues being somewhat randomly inflated by the stock market is equally applicable to fund and platform providers to name but two.
    Maybe the point about transition requires a highly generous time line. When I entered the FS domain, in 1979, commisson was absurdly high, though I was advised by my elders that the world used to be much wilder with term assurance on a commission rate per sum assured and the provision of TVs and music centres for nice big pension cases. So perhaps we are on a very slow journey from absurd through to inappropriate and then onto somewhere a bit better.

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