We seem to have gotten past the active versus passive argument now, which is good. The cool kids have gone on to argue over how you charge fees.
You can load whatever you want. You just need to be able to demonstrate that the charges are commensurate with the service the customer receives.
Did you know that the way the majority of advisors charge these days is actually the result of a marketing exercise by an investment house?
In the days of the commission, instead of paying large lump sums, the investment company came up with the idea of paying a smaller amount and the rest “drip” – 3% upfront and 0 , 5% continuously.
The 0.5% per year trail was never designed to reflect a level of service and yet this is how an entire profession has played out. It just took. Unbelievable.
When we were looking at the barrel of RDR, the consultants realized that the “drip” model might be the right form of evolution for businesses to follow and suggested it as “fresh”. All they have done is move the “commission” from being paid indirectly by the supplier to the “commission” paid explicitly by the customer.
Everyone knows cost is what you pay for and value is what you get, but it can be difficult to properly present your value if you don’t know what customers value.
I’m not sure which is the correct way to charge, but thought it would be interesting to see what consumers thought. Crazy idea, I know.
So we commissioned a little research involving 100 UK consumers comprised of men and women aged 18-99, all earning over £ 35,000 a year.
We presented them with the following scenario:
- You receive a service from someone, whether it is one-time or ongoing.
- Part of this service can mean the need to purchase a product.
- The person providing the service has to make a living.
We then described four payment options:
- The person you do business with is paid by the people who make the product that you might need to buy as part of that service.
- This payment will be a percentage of the value of your purchase.
2. Price based on the product purchased
- The person you deal with charges you a fee for the service.
- This fee will be a percentage of the value of the product you may need to purchase as part of that service.
3. A package, known in advance
- The person you deal with charges you a pre-defined fee.
- These charges will be a fixed charge unrelated to the value of the product that you may need to purchase as part of this service.
4. An hourly rate, known in advance
- The person you deal with charges you a fee based on the time it takes for the service to be delivered.
- These charges will be a fixed hourly charge unrelated to the value of the product you may need to purchase as part of this service.
Interestingly, but perhaps quite predictable, the majority of people (47%) felt that the commission served the best interests of the person providing the service, rather than the interests of the customer or the company providing a product that may need to be purchased as part of the service.
What you might be interested to learn, however, is that even more people (54%) felt the fees based on the product purchased were the same. They felt it served the best interests of the person providing the service before the customer and the company providing a product that may need to be purchased as part of the service.
Overwhelmingly, 55% of those surveyed preferred a flat fee as a payment model for one service over the other three.
When we explained that the service in question was advice and the product a form of investment, this preference for a fixed-cost model rose to 58%.
It’s fascinating when respondents told us that they think advisers take their fees in the form of a commission.
The only question customers often ask us is “what are other businesses doing?” “. This is fine, because you don’t want to do the “wrong” things. But I think if you build a business around a pricing model that works for you and sets you apart, it can only be a good thing.
Damian Davies is Managing Director of The Timebank