Are you paying the price for the wrong charging model?

November 13, 2015 SSP Limited

Although it has been nearly three years since the Retail Distribution Review came into effect, it still influences many of the decisions financial advisers make today regarding how they price the services delivered.

At the dawn of the post-commission world, firms had to choose how they set their charges and how these were reconciled, with the main focus being on how advisers were remunerated. To achieve this, a lot of different models were considered, such as a flat fee, sliding scale or a tariff based on the value added.

Yet there was one thing that everyone concurred on back then — an agreed price would be preferable to a charge based on an hourly rate. But how can you tell if the models adopted back in 2012 are still appropriate for today's financial adviser?

Nowadays, financial advice is moving from being an industry to a profession. Yet the charging model used by other professions, such as law and accountancy, is very different to the one used by financial advisers. Regardless of whether clients of classic professional services firms are billed on an hourly basis, according to a proposal or via a fixed-fee structure, all of these methods have the hourly rate that financial advisers previously rejected at their core.

While it is up to you what cost structure you put in place, it is impossible to know if this is the most appropriate without the data to prove it. How else can you tell if you too should now be implementing an hourly rate model or if it is better for your clients to pay for the services they receive? Moreover, what is in the best interests of your firm is not necessarily most appropriate for your clients' needs.

At an SSP round table on RDR-compliant adviser charging structures back in 2010, Rhys Francis of Lorica Wealth Management said the "profitability of charging models will depend on the cost of advice, and costs will come down with the efficient use of technology" — and this still applies today.

The key to understanding the appropriateness of any particular charging method, and hence achieving profitable growth, is data. In particular, the use of better management information (MI) combined with the latest platforms.

MI comes to the fore in terms of helping you understand your clients' current and potential future worth, as well as the time that advisers are expending on each particular one. With such solutions, you can drill down into all the available data, interact with it and then identify the key trends.

One example of this is the importance of time recording to make informed decisions on whether your advisers are focusing on the most valuable clients. As all activity costs money, it is important that advisers appreciate how valuable their time is and record how they spend it to ensure you are getting the greatest value from their time. This should not be an arduous undertaking, as software such as SSP Adviser has the tools in place to fully automate this process.

By having such systems in place, you can be sure you are treating customers fairly and maximising your profitability. Of course, you may discover that what works for corporate clients is not applicable for individuals, as consumers are not used to receiving invoices.

However, one thing is clear. Without the data to prove what the most appropriate charging model is for your firm now, you run the risk of being stuck with a previous decision that is no longer relevant in today's marketplace.

About the Author

SSP Limited

As the leading global supplier of technology systems and software for the insurance industry, our role is to help insurers and brokers operate more efficient businesses. So whether you’re a global insurer or an MGA, a high street broker or a start-up with a smart new idea, we can be trusted to support you on your journey, whatever the destination.

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