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Before its introduction, many commentators were predicting that the RDR would result in a fall in adviser numbers and associated new business volumes. Happily, this hasn’t materialised.
We work closely with advisory firms across every region of the UK and all of them reported an increase in business last year compared to 2012. The majority of advisers attending our workshops and seminars last year agreed with this statement. So much for predictions! Of course, while sentiment among firms remains generally positive, challenges remain. In our discussions with advisers, common themes keep appearing.
- how to find more of the right type of clients
- how to increase profitability
- how best to articulate their proposition in support of fees
It is actually the last topic where we are getting the most questions and which I want to focus on in this article. The key commodity in helping clients understand what advisers can provide for them is information. How we present this information is crucial. To help identify how well advisers are doing this, I tend to ask them the following three questions:
1. Is your proposition clearly written down (in a place other than your disclosure documents)?
We have evidence that shows a clear proposition can really illustrate to clients how serious you are about what you do. This may be shown in a diagrammatic/schematic way to help understanding.
Process diagrams, for example, will ideally be circular rather than linear so that they illustrate the expectation of a longer-term relationship. A super summary of the stages that the client will go through, and where they currently are on that journey, will also help the ‘buying process’ for both new and existing clients.
Providing collateral before, during and after a client meeting is another helpful step. Of course, people buy people but providing supporting brochures can accelerate trust. Managing to demonstrate this is something I estimate only 30% of firms actually achieve. As Einstein said, “Everything should be made as simple as possible, but not simpler”, and this is an easy way to do this.
2. Are you clear on how to structure your fee options?
Of the firms we met last year, 70% had not undertaken a specific exercise to work out what fees were required in order for them to remain profitable. This was quite surprising as the process really doesn’t take long. There are also some fee calculators available.
Only 35% of firms we encountered last year included a ‘minimum fee’ as part of their offering. In our opinion, minimum fees are the most understated buying aid a firm can have. Of course, if they are not properly explained you run the risk of clients seeing them as the only fee they pay. Minimum fees help clients to select themselves, that is, whether to do business with you or not – so you do not have to say “no” to those perceived as ‘less profitable’. Minimums are there to cover your time and give certainty to clients. However, they do need combining with another area to complete the picture – fees should be a combination of time spent PLUS your ‘business risk’ premium.
The business risk premium is made up of things such as your ‘client safety net payments’ to the FSCS and PI cover, as well as your funding of capital adequacy. It will also account for your skill in recommending how to start a plan and maintain it over time. We know that generally it does not take ten times as long to give advice on an investment portfolio of £1,000,000 compared to one of £100,000, yet it does carry ten times the risk to the client if you get things wrong. Clearly PI costs don’t increase by ten times the premium either, but they do increase to reflect the level of business you write. So having a total that is based on a percentage (which ideally reduces the higher you go in value, even though the actual pounds increase) in addition to the minimum fee provides comfort for clients. It also makes business sense and helps avoid the ‘dealing bias’ concern of the FCA.
3. Do you articulate value in the right order?
Warren Buffet once said “price is what you pay, value is what you get”. Stressing the value of what you do – including all the activities you conduct for clients behind the scenes – is very important. However, stressing what you are helping them to avoid is also key. For instance, preventing a client missing out on a valuable allowance (for example ISA) or missing out on a refund (for example tax relief) is also a valuable service. Ensuring clients do not give away too much money unnecessarily to the taxman is another example (such as ensuring money is allocated to the right wrapper in the right person’s name).
Most propositions I have tested can also be described reassuringly up front to a client, and without confusion, by stating what the fee will be, that is ‘no more than‘, early in the meeting. One way to do this could be along the following lines: “I do not know at this early stage what the specific fee will be, which is why we are meeting now to explore this further. To remind you, I am covering the charge for this time today. However, I will be able to tell you at the end of the meeting that the fee will be no more than a certain figure. This will also be listed in this supporting document.”
Describing the methods of payment available to a client BEFORE defining the actual amount can also help the buying process. This is a complete reversal of what happens in a restaurant when you get the bill! Also, by explaining that the most tax efficient method for the client to pay their fee is to write you a cheque directly keeps the buying brain happy, but also helps address the issue that most advisers mention – “It is harder to collect fees directly, than via the fund/platform”.
Finally, the ‘3:1 ratio’ nudge technique, has helped a number of advisers to remember to do things in the right order. This is the number of ‘value-related statements’ raised before price is mentioned, that is, value, value, value, and then price.
So, in summary, keep turning up the volume on what you do, as well as what you prevent people from losing out on. Remember, price is only ever an issue in the absence of value.
Paul Young, Director and joint owner, Your Leadership Footprints