Graham Bentley is not pulling any punches in this month's column as he addresses the question of the value advisers offer - and reminds businesses that is a judgement only their clients can make
The FCA's recent declaration of intent to focus on competition and charges has, predictably enough, raised some advisers' hackles. The ‘price of advice' has been discussed at length in the trade magazines, with most advisers taking a defensive stance in the comments columns - generally via a sentence featuring the word ‘value'.
Commentators have remarked on the narrow distribution of adviser fee data. Certainly, it is remarkable that, in an industry of vastly different businesses and client profiles, the most common pricing structure is virtually identical to the pre-RDR commission rate on OEICs and unit trusts. Furthermore, this structure is applied equally liberally where financial planning is being conducted.
Since financial planning advice does not require the purchase of a product, similarly it does not require the control of clients' capital. In order to satisfy an ad valorem business model, however - and for platforms to facilitate fee payments - the adviser has to control the capital and justify doing so. No wonder second-hand fund picking - aka the model portfolio - has proliferated.
Advisers are confident in their value - particularly where financial planning is concerned. There is, however, less confidence in evidence when it comes to pricing that service separately from investment management.
Conflating the two services neatly solves that problem and one adviser comment I saw recently is worth quoting: "It is in the financial planning that we deliver most value to our clients. However it is where value is least visible to the client."
I am afraid it is not an adviser's place to determine the value of their service. The vendor sets the price, but it is the purchaser who determines value and any subsequent loyalty, by how differently the service proposition makes them feel.
Few advisers have a service proposition - not a menu of services, but a proposition that tells a customer why you exist; the needs you satisfy and how you're going to help them get whatever it is they want from life. How you are going to make them feel.
None of this may require a product but successful service outcomes come at a price. Airlines simply deliver people to destinations. But the flying experience determines the price. A Singapore Airlines A380 is fitted with 12 First Class seats, 60 Business and 369 Economy - 72 seats apparently generate 60% of their flight revenues. Etihad's First Class suite, The Residence, costs $38,000 (£29,000) for a one-way flight from New York to Mumbai. There is no shortage of takers.
It is absolutely the adviser's place to determine the price - but you cannot price a product or service until you know how much it costs to provide. I wonder how many advisers run cash flow modelling for clients, but do not do the same for themselves?
Equally, I find it odd that advisers may challenge product providers on their ‘financial strength', while perhaps being less familiar with their own. How many set their prices relative to costs, target revenues and profit carried forward?
Do you know how efficiently you employ your available capital? Do you have a spending model - in other words, percentage commitment to staff training, revising and refreshing processes and procedures, and new services? Or did you just cut and paste commission rates and jack the trail up?
Analysis of an adviser's client segments by revenue generated is often a catalyst for change. A minority of advisers charge hourly rates (my own adviser does), typically £150-£200 per hour, but more than half of advisers ‘tax' a client's wealth at up to 1% a year.
With the 10-year gilt yielding less that 1.2%, and a 2.5% inflation rate, historic risk premiums suggest a 60/40 global equity and bond portfolio should expect long-term returns after inflation of around 2.5%. When an adviser and platform fee is deducted, that doesn't leave much for the client. But there are other services that can be priced that do not require a performance outcome - again, that is a financial planning or coaching proposition.
A number of forward-thinking advisers recognise they may be great with clients but not so good at running a business. Recruiting a professional CEO has subsequently encouraged proposition and price reviews. These are generally businesses with ambition.
Of course, if yours is a subsistence operation - funding a nice life for the family, nice house, car and holidays - and you have no grand design, none of this may make any sense. But understand that the only reason your business exists and that anyone else should care about it, is because of the lives you change through your advice.
Your customers are not there to serve you - you are there to serve them and the revenue follows.
Graham Bentley is managing director of investment consultancy gbi2. You can read more of his columns here
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