Alex Campbell, managing director at Campbell Harrison, on why promoting advisory services based on low charges is a risky business...
It is a sign of the times that people tend to make decisions based on cost alone. In the case of IFAs, it can be frustrating that clients are put off by service charges for investment planning, even when they can see it will benefit them financially.
At Campbell Harrison, I have recently lost two clients even though they had both been successful with us. For one, we achieved 100% growth in five years, for the other, 50% in three years, yet both left us for advisers who said they could do the job cheaper.
The problem with choosing an IFA based on charges alone is that, in my experience, few advisers know the returns they have achieved for clients. This is due to an undisciplined approach that sees these advisers recommend whichever solutions are in trend at the time or those offered to similar clients in the past.
'I lost clients to a 'cheaper' adviser'
If an IFA does not know the numbers, how can clients know if they have made a sound financial decision?
When clients choose IFAs based purely on charges, advisers will look at the projections and might say: "If company A achieves a gross return of 5%, you will receive a return of X%. However, because your IFA charges X, you will receive less, so you should move to us because our charges are lower."
But predictions like these compare cost, not potential results. If company A has an inferior investment, this will quickly nullify any cheaper cost. This is obvious if it is explained to potential clients, but often it is not, so clients are not making a decision based on all the facts.
The above scenario is often justified by the client like so: "We don't know what is going to happen in the future as returns can't be guaranteed, so we'll base our decision on charges." As financial investments have an inherent risk, this point of view might seem reasonable, but imagine if the same argument was applied to football. It would be akin to offering identical odds on winning the championship at the beginning of a season to Manchester United and to Southampton, because both start on zero.
The problem with this approach is that, once clients see their investments are not reaping the rewards promised and you cannot offer them evidence of the results, you will lose their trust.
Cost of charges is, of course, a key factor in the decision to choose an IFA but it is important clients remember it is not the only factor.
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