I held a meeting yesterday with an accountant who was interested in referring his clients to us but did not really understand the way we charge fees. He explained like many accountants he charges a fixed fee for dealing with the clients accounts including corporation tax calculations and dealing with companies house submissions. He then charges additional fixed fees for projects or by the hour, depending on the work to be done.

I asked “Would you work without being paid?”  His look told me the obvious answer.

So I explained that commission - the way Independent Financial Advisers used to be paid is slowly but surely dying out.

Payment by commission has led to many of the major scandals with Pensions misselling being the best known. The problem basically is that if one provider pays an adviser more than another provider for the same work, it is in the adviser’s interest to place the business with the highest commission payer. This may not be in the client’s best interest.

A pre agreed fixed fee for the work agreed between client and adviser avoids this conflict of interest.

I explained our process can be divided into steps 1-3 for all clients and step 4 for some clients

1. Client engagement
2. Advice to the client – which may or may not involve a financial plan
3. Implementation of the advice
4. Review and maintenance plans and/or investment management  

Steps 1-4 all involve pre agreed fixed fees being paid by the client directly to us. (There is a free initial meeting to see if we can help)

There are some anomalies relating to step 3

• If step 3 relates to investments, clients can decide to pay by cheque or we can take exactly the same amount from the investment portfolio.
• If step 3 relates to pensions it is usually more tax efficient to be paid from the pension plan provider – as long as the figure is still the same as the fee
• If step 3 relates to a product which we cannot reduce the client’s premiums by giving up all rights to commission we will refund the commission to the client. This can be quite interesting with large mortgages as often the commission refunded to the client is larger than the fee they paid to us. It seems we are paying them to arrange a mortgage for them, which is quite strange.

If step 4 involves ongoing investment management we will charge a percentage of the money under management paid by the product provider ONLY if we are providing regular ongoing advice. Our existing clients get about 10+ contacts a year in writing on this.

Why do we have this “complicated” structure?

In my experience clients like it and it works because:

• People don’t like paying by the hour – it’s an open cheque book
• Payment by commission, when the product provider decides how much the adviser gets paid leads to a conflict of interest between  financial advisers and their clients
• Paying a fixed fee per year leads to “loss” by client or adviser as the amount work varies in different years
• Our system works because you know what you are paying for each project you ask us to advise and help you on. 

The new RDR (retail distribution review) currently being enacted by the Financial Services Authority will in 2012, force all advisers to work in a manner similar to how we already work. The main point they state is that the amount the adviser is paid is decided between adviser and client - not by the product provider.

Ok, all this took a while to explain but it’s better stated up front then hidden in the small print.

Oh yes, there is one other way that clients pay us – referring us to friends and family for a job well done!