In the first of this series of three articles, we explored the butterfly effect and the early days of the Retail Distribution Review (RDR). The world didn’t end but it did profoundly change the way firms were remunerated.
In the second we looked at how firm remuneration changed from being provider-driven to client-driven and, in this third article, we will explore how one might consider constructing a charging strategy in more detail, and whether it should, or should not, be different for post-retirement advice.
The phrase ‘clear, fair and not misleading’ often crops up in regulator publications, so first off let’s dispense with the ‘not misleading’ bit and concentrate on clarity and fairness. TR 14/21 is a good read in you’re into making sure your charges and your advice solutions are clear. This is the area of advice where the regulator wanted to give guidance to ensure that clients understood a firm’s charging structure, which neatly leads into PROD, which neatly leads into constructing a centralised investment proposition.
Everything is interconnected in an interconnectedness sort of way, so let’s concentrate on one area; how do you ensure that your charges are fair?
In business consultancy, we have experience of more than 200 consultancy sessions, many of which look at how a firm charges. The starting point is always two questions:
- What are your charges? (This is the easy one)
- How did you arrive at those charges? (Not so easy)
With all honesty, in all the consultancies we have done, no firm has been able to adequately answer the second question. It’s usually a case of “we’ve always charged this way” or “it seems about right as most other firms do the same”, so here are two more, which are similar but different.
- How do you know your charges are fair?
- How do you demonstrate that your charges are clear and fair?
At this point, it’s time to get down working through the key points, which are identifying the cost of manufacture, setting minimums and setting thresholds.
The cost of manufacture involves taking a theoretical charge per hour (have a look at the FCA’s Data Bulletin Number 7) and multiplying it by the amount of time it takes to conduct an initial and ongoing advice process. But, when you do consider the time it takes to conduct your advice process, remember Hofstadter’s Law, and here’s what Wikipedia has to say about it:
Hofstadter’s Law: It always takes longer than you expect, even when you take into account Hofstadter’s Law.
And it does; firms tend to underestimate the time it takes to deliver their advice, which makes the task of getting it documented and then finding inefficiencies to streamline the process so important.
From here, the cost of manufacture will highlight what your minimum charge should be. If you know your minimum charge, you know the threshold amount of investment, and if you know the threshold amount of investment you can compare that against your client bank to see if it’s representative and proportionate. This goes some way in demonstrating that your charges are clear, fair and not misleading. Everything is interconnected in an interconnectedness sort of way.
Retirement clients
Finally, should your charges for post-retirement client be different? Income in retirement is an area that the regulator is concentrating on in their Assessing the Suitability of Advice 2. It was due out this year but ‘something got in the way’ and it’s now been put back to next year.
The regulator is looking to build a view of the retirement income advice market on areas such as:
- Focusing on advice received, retirement income and retirement risk
- Stressing the need for good advice at the point of accessing income
- Make sure firms have sufficient systems and controls in place
And if that’s the case it might be time to seriously look at your advice process and consider which tools you will use to take this into consideration, but also how you charge for this?
If you undertake a cost of manufacture exercise for clients in the accumulation market then given the change of risk, administration and monitoring for a decumulation client, should you also consider a similar exercise?
Karl Dines is head of business consultancy at The SimplyBiz Group