Dominic Thomas of Solomons discusses the impact of the sunset clause on the firm’s fee model, how it’s focused their view on service, and what it means for legacy clients.

    Solomons is a small firm and has operated on a fee basis since 1999 so the problems are not as pronounced for us as they are for many.

    Like most firms, we began using fund supermarkets when they were launched, as the market has developed over the years we have switched platforms and now use Nucleus as our main platform of choice. As all pensions and investments were essentially set up on a single premium costed basis since our formation in 1999, we don’t have problems with the conversation about portfolio fees that some firms seem to struggle with.

    Clients don’t even want products, they want reassurance that their money isn’t going to run out.

    Over the last two or three years we have been gradually moving pensions and investments where sensible to do so. Whilst we always charged fees and have fee agreements in place with clients, this has not exempted us from the same problems. We have seen this as an opportunity to further rationalise our client list and offering and have been reviewing pre-RDR arrangements appropriately.

    Let me admit that I do not believe that I have got our fee model completely right, in truth it has been altered numerous times. In 1999 we charged 1% initial and 0.5% fund based on everything – essentially a single premium based model. We also charged service level fees, which are paid by monthly standing order. Additional fees are levied for specific pieces of work.

    My basic belief is that I think it fair to have a linked relationship to a client’s investment performance, but not exclusively. When the client loses, so do we, and vice versa. However allowing all of your revenue to be linked to the market whims doesn’t make sense to me. So we have always charged service fees. The amount varies and we collect this by standing order each month. This makes up a reasonable proportion (25%) of our total income… providing some stability and attempting to price many of the administrative tasks performed each year. It’s not perfect.

    We also charge implementation fees, but these rarely go above 1.5% and are often far less. We waive implementation fees when we move money between platforms and we don’t charge fund switching fees – I consider this part of our work for the fund based. We charge fees for specific pieces of work and drawing up a financial plan. It’s not top dollar, but it’s not cheap. I take the view that our fees need to be ‘more than worth it’ so any fee ought to be recouped by the client as a result of the advice - preferably as a 5x multiple of the fee. So for a £1500 fee, can I add back £7,500 to the client within 12 months… invariably, yes I can.

    The sunset clause has enabled all firms to review fee levels and services. On the one hand the regulator has given advisers no option but to charge fees, which of course means ensuring that the fees paid concur with the agreement – most old arrangements don’t fit most models. So unless someone is willing to pay directly (big issue) for the service rather than coming via the product (which saves enormously on accounting) most will need to alter portfolios so that this can be facilitated.

    The uncomfortable truth is that regulator is probably right in its inference that many people don’t get much service for their 0.5% or 1%... or whatever. If we are honest with ourselves, we all probably have some old legacy stuff where the relationship just doesn’t work anymore. Of course many advisers are now providing a massively improved service from say five or 10 years ago, which presumably is adding value and valued by the client. Those that pay, pay attention and all that.

    It seems to me that a major problem firms have is advising those in the decumulation stage – spending their capital, which by implication means that you are looking after reducing assets. So somehow we all need to ensure that we have the right balance between accumulating clients and decumulating clients. This is partly age and income profiling. We might consider a real inter-generational family service, much like firms in the US or simply ensure that you have a sufficient client mix.

    So sunset really rams home the point that you had better figure out what you want to offer and who to. Inevitably your new service/s will not suit all of your legacy clients and it’s time for everyone to move on. I appreciate not everyone takes the same view, but mine is that this is an ethics issue – if nothing is really being provided, then frankly it’s probably worth nothing.

    The uncomfortable truth is that regulator is probably right in its inference that many people don’t get much service for their 0.5%.

    I’m mindful that some appear to respond to the problem by being seen to be doing something. This may mean copious numbers of emails, reporting on the value of holdings, switching funds every ten minutes or simply sending more and more stuff. Technology continues to promote this behaviour and it’s easy to fall into the trap of manic information production - you could quite easily spend sunrise to sunset producing market information, various charts and graphs.

    Standing back, whilst I am sure that everyone will be able to think of some exceptions, most clients don’t want ‘stuff’. They want value and they want an experience with you that improves what they have and tells them what is really important and what isn’t. The art of curation.

    I’m in the Paul Armson camp that believes that clients don’t even want products, they want reassurance that their money isn’t going to run out. So sending loads of investment bulletins about the state of the market doesn’t help reduce anxiety – it merely fuels it. Yes we have to explain how products work clearly, but without boring clients to death. Remember its curation – showing what is of value, or what prompts thought, not showing every last detail.

    I’m of the view that clients want us (as advisers) to have them in mind, to be thinking of them carefully and not mail bombing them with opportunities or warnings about things few of us can really control. I recall a graph that Phil Billingham used to use (perhaps he still does) which made the point about what clients value – mainly when they see us, yet we know that the bulk of the work (and cost) is done behind the scenes. So somewhere between spewing information and keeping silent about what you and your team get up to is the perfect balance. That requires thought and creativity.

    I see sunset as an enormous opportunity, but one that needs planning.

    To find out more about the sunset clause and how you can get ready download the Nucleus whitepaper, The sunset clause: making informed decisions.

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