The transition to advice-based fees can reduce the impact of the proposed RDR changes on your business and improve business sustainability.
The Retail Distribution Review (RDR) discussion document released in 2014 proposed changing the remuneration structures for financial advisors. Masthead proposed that the Financial Sector Conduct Authority (FSCA, previously known as the FSB) allow for a transitional period to introduce new fee models.
A survey Masthead conducted in 2015, revealed that 42% of advisors felt very uncomfortable about charging advice fees. Advisors mainly believed clients would not be prepared to pay advice fees that are separate to commission.
Finding a solution
From the RDR proposals and subsequent updates it is clear commission on long-term risk business is not being completely banned. Instead, the FSCA is proposing a regulated remuneration model in which clients pay fees and product suppliers pay commission. Clients will need to pay for work done for them, such as advice given or a needs analysis, while product suppliers will pay commission for work done on their behalf, such as submitting and servicing business.
The FSCA is currently conducting technical research, which includes the knock-on effect of remuneration caps, activity segmentation and possible overlaps of activities for which intermediaries are rewarded. This fits in with the RDR’s activity-based approach to remuneration and reinforces the current thinking.
If you have a clearly defined business model, you should be able to define all the activities, time and direct costs involved in delivering on your value proposition and communicate this with clients. If clients know the scope of your services, it is easier to attach value to the service being offered.
Many advisors currently rely on commission, particularly upfront, but some have introduced alternative revenue models, such as asset-based fees or time-based fees. An asset-based fee is determined by the size of an investment, while a time-based fee hinges on the amount of time spent on providing services or advice, either as an hourly rate or a fixed fee per service.
To illustrate this principle, imagine it is time for your next vehicle service. Each service has a specific fee, based on the number of kilometers your vehicle has travelled. You contact the service centre for a cost estimate of the service so you can budget accordingly. You also know that over and above the service fee, there are additional fees for specific items you choose to add, such as new brake pads or wiper blades.
In the same way, you can substitute ‘advice fee’ for the service fee, while the additional fees are the specific services a client contracts you to perform. Knowing what your time is worth per hour makes charging fees simpler to motivate and do. When clients know what they are paying for, they can ‘contract’ with you accordingly.
Benefits of RDR
There are benefits to implementing RDR. The RDR objectives of enhanced professionalism will improve customer confidence and trust. Fee transparency will allow for fair competition for quality advice and services, and you will be incorporating the TCF Outcomes in your business. If customers can understand and compare the nature, value and cost of your advice and other services, your reputation will improve.
Masthead’s future-fit model supports annuitised revenue models that incorporate the TCF Outcomes. Based on the UK experience of RDR, advisors who centralised their business around the customer enjoyed success. To ensure your business remains future fit, set your pricing models in place sooner rather than later, keeping customer interests at the fore.