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  • Advisers who are hoping that the concerted effort being made by certain MPs will derail the proposed regime should think again. With less than two years to go, firms who haven’t got an RDR-ready charging structure need to be devising and implementing solutions now. And we are keen to help. Over the next 20 minutes I want to highlight some of the research we have collated on attitudes to adviser charging among consumers and briefly look at the few of the strategies we will detail in our paper regarding how to implement a robust adviser charging approach in your business.
  • A policy statement finalising the charging proposals was released by the FSA in March last year and the regulator hasn’t made any noises that it intends to move from these proposals in any way
  • In the paper we are releasing this spring we want to press the pause button the philosophical debate about the rights and wrongs of adviser charging and start delivering practical guidance on how adviser charging can be implemented within your business within the next 23 months. This paper is primarily aimed at IFAs who have been commission-based and are perhaps considering a fully-fee based model for the first time – but equally it will be of interest to firms that have attempted to increase the use of fees but who haven’t yet come across a model that works successfully for them. [Incidentally a semantic point – I am going to use the term fees to refer to adviser charging although I appreciate they are not necessarily one and the same thing – but for the sake of simplicity, please let’s accept that fees can be defined as charges agreed with the client even if integrated into the product cost]. Whether you are implementing an adviser charging model for the first time or upgrading an existing one – these are the questions you have to be asking and finding answers to. The bottom line is are you delivering a service with a value: how do you convince enough clients to make your business profitable that you offer financial advice that is worth paying for?
  • It is no exaggeration to say establishing a culture of explicitly paid-for financial advice in this country will be a huge challenge. Our findings from a survey of 2008 adults across the UK covering all ages, regions and socio-economic groups conducted late 2010 revealed that just 5% of the population are currently actively paying for advice. Although a potential target audience of 1 in 20 isn’t horrendous – in a population of 40 million adults that equates to 2 million clients – it isn’t a very heartening statistic for IFAs looking to implement a fee-based service for the first time. But perhaps we should focus on the big blue slice in this diagram – and the fact that more than 9 in 10 adults don’t KNOW if they are paying for advice or not. Odd isn’t it? People certainly know if they are paying for tax advice, or for legal advice but when it comes to finance most of the population simply don’t know because the cost has been hidden for so long. Consequently the value of advice is pretty much unknown. You don’t need me to tell you there is a huge education programme to be done here to shift the perception of financial advice from a negligible freebie to valued professional service – but this slide pretty much confirms it.
  • But there is hope. Survey after survey has shown it’s incredibly hard to ask people whether they would pay for financial advice because its hard to get non-users in the frame of mind where they see the value of such a service. In our survey, we posed the question in a variety of different ways and what we found consistently was that people aren’t paying for financial advice because they are unwilling to and object to paying someone but because they just don’t see they have a need for this service. In most cases they feel they can guide themselves or they are receiving sufficient advice from other sources. In other words, it rarely occurs to people yet that “Gee, I wish I could pay an expert to sort out my finances”. But this should be a source of optimism – there is no active objection to paying for advice just a lack of active appetite - and that is what we need to trigger.
  • This should be a further source of optimism – at least for those that agree with the concept of client-agreed adviser charging. While unsurprisingly few people know that adviser charging is coming, around 6 of out 10 people approve of the concept and a third back it very strongly. The advent of adviser charging isn’t going to make people rush to use their local IFA but it is hopefully laying the foundations for a more positive perception of paid-for advice where consumers feel more in control.
  • So of those people who are amenable to paying for advice – both existing and potential users – what are they most willing to pay for? Our research shows there is surprisingly little differentiation on different areas of investment advice. Pensions and a full financial review scored highest as services that consumers are very willing to pay for although tax-efficient investing scored highest on overall willingness. Although not strictly covered under the RDR, we include insurance as a product that people are increasingly confident about buying on an execution-only basis – and this was indeed a service for which consumers are least willing to pay for advice. What is perhaps most revealing is that few people are very eager to pay an adviser for ongoing management of their investments – there is a resistance to open-ended charging for an open-ended service. Consumers are still in the mindset where they want to use an adviser for a fixed cost for a fixed task. This is underlined by the pie-chart on the right – when asked how they would prefer to pay for financial adviser, a third of consumers want a fixed fee. Hourly fees are extremely unpopular and only a quarter want to pay a percentage of money invested. If people are going to pay for advice, they want certainty and control over what it will cost.
  • So what do consumers at large believe they are willing to pay for these tasks? The cold figures don’t look promising. For a complete financial review the average one-off fee that the population at large is willing to pay is £371.22. Pension advice is valued even lower. Now I don’t know what the total man-hours you would require to conduct these tasks but I suspect these amounts wouldn’t cover it. Now of course these are cold responses – i.e. they are asked of consumers who have no emotional attachment to the notional adviser they are being asked to picture. However consumers only put a value on individuals and services they have experienced – not an abstract concept. Which is why it is incredibly difficult to ask consumers what they think they should be paying for advice.
  • Consumers will only understand the cost and more importantly the value of advice through a process of education and promotion. In other words, advisory firms need to start selling themselves and showing what the net worth of their advice is to the potential client. This means showing what your advice has actually achieved for your clients and also stressing your position as an independent adviser – something the next slide will underline.
  • To market advice effectively you need to know what attributes would most encourage a consumer to pay for an adviser’s services. I mentioned the importance of promoting independence just now – and in our research, independence was a critical factor for one in three consumers alongside face-to-face access. Interestingly, qualifications are not so important as membership of a reputable body. And while – as we have seen – consumers are not willing to pay excessively for advice, competitive charges alone would not be an incentive to use a firm. One other interesting point is how low down in this list comes personal recommendation. In many surveys we have conducted in the past, personal recommendation was one of the key drivers behind selecting a particular adviser but not in this case. [NOTE to Jasper: in this question, respondents were asked to pick the three things that would make them most willing to pay for an adviser’s services]
  • When it comes to determining adviser charging for the first time, it is very tempting simply to try to graft your current commission structures on to a fee-based framework. For example, you’ve always worked on 3% initial and 0.5% trail so why not just continue with that? It’s what clients know – it’s what they’ve accepted so surely it’s the easiest sell and therefore the easiest to implement? Well possibly not. The drawback of working on this basis, is there is absolutely no logical link between what you are charging and what turnover your business needs to achieve so you are flying in the dark.
  • This slide shows the dangers of simply trying to impose a commission-based structure onto fees. In a recent survey conducted through New Model Adviser we aimed to ascertain the average price of the tasks performed by an investment adviser. First we asked what initial fee advisers would typically take on different lump sum investments. In this example of a notional £100,000 capital sum, the average initial fee cited was 2.3% - or £2,300. We then asked advisers to estimate what percentage of total time spent they would spend on the different tasks involved in setting up an investment for a new client. This enabled us to calculated the effective “price” placed on each stage of the process. This is a valuable exercise because it forces firms to question 1) Are we allocated time appropriately to the most value-added tasks and b) does the revenue received adequately reflect the time we need to deploy on each of those tasks. This also opens up opportunities to see where potential efficiencies may lie - for example well over a third of the cost - £847 - is allocated to time spent setting up the investments. Could platform technology or the use of non-advisory staff be used to reduce the time spent on these administrative tasks so more time can be spent on value-added tasks like client meetings and proposal research? For any firm, it will pay to break down any client advisory process into their constituent tasks and agree what is the price that should be attached to each one rather than hoping that the cost charged will cover it with a little to spare as profit.
  • So here’s a more logical way to assess what you need to be charging – which means starting with what your business needs to earn in a year including net profits – and then working back to see how many man-hours are required to generate that As a very rough rule of thumb adviser-facing staff should be capable of completing 1,000 hours of chargeable work a year – or 21 hours a week assuming four weeks holiday.
  • Using this approach quickly allows a firm to see if its revenue expectations are reasonable given its charging capacity. If the figures aren’t right, then a firm has a number of levers by which to adjust the formula – be that trying to increase the maximum possible man-hours chargeable across the firm, increasing the fee it can charge or reducing its cost base. But whatever solution is deemed suitable, you at least have a target figure of what you need to achieve.
  • So here are a few other strategies we will be discussing in the paper. Having talked to a range of advisory firms, the key message is flexibility on charging structure, clear communication as to what clients are paying for and the ability to adapt as the client relationship matures and assets under advice increase.
  • We hope the report delivers hard, practical guidance to any firm looking to implement adviser charging. The time to start talking about adviser charging whether to everyone within your business or to your client base is NOW. There are solutions out there that are practical to adopt, that can help make your business be more robust and – ultimately put a real value and a fair, attractive price on what you do. It’s a challenging time, it’s an exciting time – good luck.

Jp morgan Presentation Transcript

  • 1. Adviser Charging Knowing (and showing) your true worth January 2011
  • 2. It’s time to face adviser charging head on
    • How J.P. Morgan Asset Management is looking to help
    • Practical paper on how to implement adviser charging successfully to be released this Spring
    • The Financial Service Industry will need to adjust fund charging
    • J.P. Morgan Asset Management Academy module focused on adviser charging in development
  • 3. Adviser Charging – a quick recap
    • From January 2013:
    • All adviser firms should ONLY be paid through adviser charging for the advice and related services they provide
    • Charges must be set out upfront and agreed with the client rather than commissions set out by product providers
    • Regardless of how these charges are to be paid, they must be based on the services provided to the client not the product being sold
    • No commissions – including soft commissions – can be received from product providers even if they are intended to be rebated to the client
    • Ongoing charges can only be levied where a client is receiving a clearly-defined ongoing service
  • 4. The five questions you and your firm need to ask NOW
    • What services do we need to charge for?
    • What services are consumers willing to pay for?
    • How do we calculate what we need to charge?
    • How do we determine what clients are willing to pay?
    • What systems and processes do we need to manage all this?
    In short – how do we put a fair price on what we do?
  • 5. Creating a culture of paid-for advice – the challenge
    • Question: Do you currently pay for financial advice?
    Source: J.P. Morgan Asset Management/ICM … only 1 in 20 people say they pay for financial advice
  • 6. Creating a culture of paid-for advice – the good news …
    • More than 80% of people are happy with the idea of paying for expert financial advice
    • Question: How do you feel about paying a highly qualified professional to provide you with personal advice about your savings and investments?
    Source: J.P. Morgan Asset Management/ICM
  • 7. Financial advisers outnumbered by other professionals Solicitors Accountants IFAs 128,000 118,000 20,000 Source: Regulatory bodies and industry estimates 2010
  • 8. Adviser charging: low awareness but high approval
    • Question: Are you aware of the proposed introduction of adviser charging in 2013?
    • Question: Do you approve of charging where the cost of advice must be agreed solely between the adviser and client?
    Source: J.P. Morgan Asset Management/ICM
  • 9. Consumers prefer to pay for one-off tasks for one-off fees
    • Question: How willing are you to pay for the following services?
    • Question: By what method would you prefer to pay for financial advice?
    Source: J.P. Morgan Asset Management/ICM
  • 10. What are consumers willing to pay? Source: J.P. Morgan Asset Management/ICM Question: What would you be willing to pay as a one-off fee for the following services? Avg acceptable fee £371.22 £324.22 £257.89 £256.11
  • 11. Time to start selling yourself
    • Clients underestimate what they are willing to pay because they don’t know what they are paying for
    • Show how your service breaks down into its constituent parts – so consumers can understand and appreciate the complete process involved – and decide which elements they really want
    • Give case studies showing how your advice has put clients at a monetary advantage – e.g. outperformance of funds, tax savings, tax relief
    • Show existing clients how your proposed fee structure compares with what they currently pay in commission
    • Stress your independence and what this means for the advice you deliver
    What is the net benefit to the consumer of paying for your advice?
  • 12. What attributes of an adviser are consumers willing to pay for? Source: J.P. Morgan Asset Management/ICM Question: Which attributes would make you want to pay for an adviser’s services?
  • 13. Calculating what your firm needs to charge
    • Scenario 1
    1. Pick a percentage initial and ongoing fee based on what you currently receive under a commission system 2. Charge all clients on this basis 3. See if resulting revenues cover the cost of man-hours and resources 4. Assess at the end of the year if you are left with a profit after costs (Say 2 - 3% initial and 0.5 - 1.5% ongoing) (Which means no reward for larger clients – or the risk of pricing out smaller clients) (Remember there is no link between what you are charging and what you need to earn) (If cost of advice is not linked to clear profit targets, you will only know if any profit has been achieved in retrospect)
  • 14. Does the price you charge really add up?
    • On a £100,000 lump sum investment, New Model Adviser readers told us they charge an average initial charge of 2.3% (£2,300)
    • The effective “price” of tasks, based on time spent on them
    = £2,300 Source: J.P. Morgan Asset Management/The Ideas Lab/New Model Adviser
  • 15. Start with where you want to end up 1. Calculate what revenue the firm needs to generate in a year (costs plus target profit) 2. Calculate the total chargeable man-hours available across the firm 3. Divide target revenue by total number of chargeable hours to determine benchmark hourly rate 4. Segment clients and rates for different tasks & personnel around the benchmark rate Remember this needs to include costs plus target profit Remember not every hour worked by adviser-facing staff will be chargeable – staff must complete timesheets to have an accurate record of how client-facing staff are allocating their time This benchmark will quickly tell you whether your revenue targets are reasonable given man-hours available With a benchmark in place, you have flexibility to adjust charging up and down for different levels of staff or propositions
  • 16. What if the costs don’t add up?
    • Your options:
    • Increase chargeable hours (e.g. take non-billable tasks away from advisory staff)
    • Reduce revenue targets
    • Reduce cost base to increase net profit
    • Upgrade client base/client proposition
    Target revenue Total chargeable hours = Benchmark hourly rate too high?
  • 17. Strategies to sell adviser charging to a client
    • Give clients certainty – e.g.: charge a time-based fee but put a cap on the maximum charge
    • Break down a completely comprehensive service into its constituent parts – consider what are must-haves and nice-to-haves to determine a basic service for less profitable clients and a premium service for top-tier clients
    • Give clients a menu of different service levels so they feel in control of what they are paying
    • Tiered charges that reduce as client AUM increases will reduce the threat of approaches from other advisers as the client’s portfolio grows in value
    • Don’t tie yourself to one charging proposition – a combination may be more suitable
    • Run parallel business models and transition gradually over the next 23 months
    Deliver flexibility, choice and control to the client
  • 18. What our report will cover
    • How to sell the idea of adviser charging to different client segments
    • Various models calculating what you need to charge to meet your expected revenues
    • When VAT is applicable
    • How to bill effectively
    • Sample timesheets, progress reports and client letters
    What else do you want us to research/cover in the report?
  • 19.
    • This document represents the view of J.P. Morgan Asset Management Limited in this subject at the date of this documents and may be subject to subsequent change. Please be aware that this material in produced for information purposes only and should not be taken as or construed as investment advice. JPMorgan Asset Management Marketing Limited accepts no legal responsibility or liability for any matter or opinion expressed in this material. Telephone calls are recorded to ensure compliance with our legal and regulatory obligations and internal policies. The information in this document is based on our understanding of law and regulation at the time of print and is subject to change. Issued by JPMorgan Asset Management Marketing Limited which is authorised and regulated by the Financial Services Authority. Registered in England No. 288553, 125 London Wall, London EC2Y 9AQ.