For a moment, imagine that the FSCA stated that they are going to accelerate RDR and professionalise our industry with immediate effect. From tomorrow, commission and asset-based fees will be banned and you will have to charge your clients fees for all the different services that you provide.
Like other professionals, you have three options around how you will implement this. The first is a menu of services with different prices, similar to a surgeon or a dentist. The second is that you charge an hourly rate like a psychologist or an accountant.
And the third is that you charge a monthly subscription like a lawyer on a retainer. Whilst the first two options are completely valid, I believe that the majority of advisers will use the third option to generate most of their income because it creates a predictable annuity income stream.
When you implement your new fee structure, you will need to explain what you offer and how much it is going to cost. Explaining your services is harder than you think because many advisers sell products, which means that they have actually been working for the product suppliers. Now that you are going to be paid directly by the client for the services that you render to them, you will need to be able to articulate it in that way.
For clients with short-term insurance products that pay as and when the commission, you could base your fee on the impact on the premium of reducing commission to zero.
Calculating the cost is the easier part because you can replace your existing ongoing income with a fee for service. For example, where you have clients who are paying you annual review fees, it is easy to work the maths backward from, say, 0,5% on R1,2m to a monthly fee of R500.
For clients with short-term insurance products that pay as and when the commission, you could base your fee on the impact on the premium of reducing commission to zero. However, the crux of all this comes down to your clients experiencing ongoing value for money.
This is best illustrated by an example, so let’s assume that you implement a flat fee of R200pm for each of your 400 clients. This means that you’ll have a monthly income of R80,000 and that your practice will be valued at R2,88m on a 3x multiple.
As time goes by, your clients will see the R200 going off their bank account every month. And like they do with all regular debits from their bank accounts, they will ask themselves whether they are getting value. This, in turn, forces you to ask yourself “what am I doing for my client today to justify the fee that I am charging?” And when you can answer this question, you are ready to run your practice like other professionals.
