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The Folly of Hourly Fees

Entering into a professional charging structure of fees to ensure that your client proposition can be worthwhile of your effort, beneficial to your business and provide a real value service to your client. It sounds easy to work out but in actual fact there is a lot that needs to be considered.  I will show you the folly of hourly fees and why you need to manage your costs.

One of the biggest understandings about charging fees has to be that they should never be your prime mover, and they should not be dictated to by your clients or the competition.

Let us just look at the new requirements, which will take effect 1 January 2013, these are:

  • advisers set their own charges for their services, since they will no longer be able to receive commission set by product providers;
  • advisers should have charging structures based on the level of service they provide, rather than the particular provider or product they recommend;
  • advisers should disclose those charges to consumers up front, using some form of price list or tariff (confirming the specific amount to be paid later on);
  • on-going charges should only be levied where an on-going service has been agreed with the client (except for charges for advice on regular contribution products)

In their "One Minute Guide" the FSA state "We will not prescribe what the charging structure should look like. Examples of structures are hourly rates, a percentage of the customer’s investment, a fixed fee, and an initial review fee. Whatever the charge, it must be clear to the consumer."

There is no mention of the fee having to be fixed or precise. There is nothing to prevent you from providing set fees for specific transactions, a range of fees for work where you confirm the final charge so that the client has the confirmation in a timely manner before any action is taken, or even an hourly rate or retainer rate for ongoing access to your services; as long as it is clear to the consumer. This is your opportunity to be creative.

From a fee based consultancy point of view, hourly rates are actually immoral and can be unethical, not to mention extremely limiting in your business growth. That is why we charge project fees on a set budget.

Let me explain: If you consider that there are 365 days a year and your discretionary time (family time) is actually your wealth (reward for the work you do) then to actually increase your income you have to decrease your wealth!

If you take a partner/director in an IFA practice, who may simplistically have 1,760 hours (220 days) to bill in a calendar year at £200 an hour, so their part of the turnover is £352,000 a year.

Assuming that there are 220 working days (after holidays both private and public as well as weekends etc.) a year and you use 30% of your time toward marketing, promotion, CPD, study, internal and external training and other non-direct revenue generating activities (sometimes more if you have staff). This leaves 154 days actual work to generate turnover for your business. Using the above "contribution" to profits as an example means that £352,000 turnover is not £200 per hour but actually over £285 per hour. Does this mean that you could be seriously undercharging or you are too expensive? Does it mean that you need to work longer, and if so, what flexibility is there except reducing the discretionary time?

Admittedly you may also have trail and Fund Based remuneration but to make that £85 discrepancy be fully negated that is £680 per day and almost £105,000 per year (alternatively £10,500,000 FUM @ 1%) before it starts to make any headway into providing you with a "profit" scenario in 2013.

  1. Question: How do you grow your business?
  2. Question: How do you increase your income in later years?
  3. Question: How do you better your family’s lifestyle?

The folly of hourly rates is a fundamental flaw due to calculating your charges on time units that are based on these time limitations.

Now to take this further, lets assume that there is 25% of turnover left as profits or drawings for a Partner/Director then that is £88,000 before tax with no monies re-invested in the business for IT changes or other crystallising risks, which leads me onto the second point; costs.

Some IFAs have a good handle on their costs and risks, many do not. If you do not control your risks (and we don't mean just business risks here) and your costs increase, or you are hit with a large cost due to, i.e. regulatory fine, new document management or back office system, high turnover of staff in a short period etc. you can find yourself in a negative situation.

Without IFA Risk Management practices you won’t realise what is going on, or why there isn’t enough money to go around. Without Risk Management you will more than likely have to increase your fees and become non-competitive whilst losing your existing client's as the pressure is on to bring the money. If this happens in you may end up being forced to make similar decisions that the RDR is supposed to remove, i.e. unethical or immoral decisions on the fees you charge. Ultimately you won't be earning less because of RDR, you will lose your business because of poor strategy.

The rules are changing, the environment has changed and those advisers who don't take the time to understand what they have and where they are going, will most likely become statistical references. As Albert Einstein said; "The significant problems we have cannot be solved at the same level of thinking with which we created them."

There are answers. There are solutions. Those who look for the answers and provide the solutions will be leading the pack in the next few years. The rest will be following some way behind or get lost in their wake. Where do you want to be?

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Author: Lee Werrell
Posted: Tuesday, November 27, 2012 | 3:39:30 PM


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