by Andy Marshall
The major boon of the Retail Distribution Review (RDR) for clients was not only greater clarity on which fees they were paying but also widespread change in fee structure. Historically, planners had earned money through commission with more emphasis on the initial payment as opposed to ongoing payments.
The natural progression post-RDR for many planners has been to move to a fee model as close to the previous commission model as possible. Typically, this can mean taking initial and ongoing fees on a percentage basis.
Other planners have moved to a different model: fixed fees. These can take many forms, the simplest being a menu of initial costs and ongoing servicing. The premise is that managing a portfolio of ISAs valued at £50,000 is broadly the same as one valued at £500,000.
Whilst conceptually it seems like a reasonable assumption that accounts of different values take the same effort to manage, how would you prove it? Time spent.
I'd argue it's worthwhile to record the time it takes to perform each process. Time recording is commonplace in the legal and accountancy professions. Why is it so rare in financial planning?
Whilst time recording can be an effort at first, once the habit is formed, it can provide a mine of information to help analyse productivity and profitability. There is often a fear around time recording that it will become a big brother-esque monitoring system to keep check on what employees are doing. Sensible management and intelligent sharing of data within the team avoids this.
Knowing the time taken to complete a process is only part of the picture. There has to be a cost attached to each participant's input into the process to work out the overall cost of that process. This is done as an hourly rate. Setting this hourly rate is largely arbitrary. There are no rules as to what can be charged for an administrator, paraplanner or financial planner. Differing levels of qualifications and experience will also impact what can be charged.
Whilst the RDR has brought some definite improvements for clients regarding the charges they pay, what they pay varies from firm to firm. Whether charges are applied as a percentage of an investment or assets under management or whether they are fixed transactional or servicing fees, clients should feel that they are receiving value for what they are paying. If we can deliver tangible and intangible value to the satisfaction of our clients, does it matter how they are paying to achieve that satisfaction?
Andy is a paraplanner at Octagon Consultancy Ltd in Bristol. He has been working in financial services since 1997 moving from compliance to advising to paraplanning.
