The situation for a number of years has been that most customers of mortgage advice firms pay for advice by commission. However, advisers considering equity release advice would do well to take a hard look at the option of charging the customer a fee.
There are a number of reasons why fee-charging in this advice area makes sense – understanding these will help the firm develop their own thoughts on whether to charge a fee or not and importantly help decide what the level of fee should actually be. In my opinion, once a firm starts charging fees it won’t look back although it may mean the advice it provides is not open to all unless the firm also decides to conduct a number of pro bono cases each year. The beauty of fee-charging is that the firm has control and can also stay one step ahead of the regulator and its Retail Distribution Review.
The market for equity release, possibly like no other in financial services, works largely on trust and security. Even the fairly recent FSA Mortgage Effectiveness Review findings support this, pointing out that ‘most respondents wanted to purchase from [a firm]...that was well known and considered trustworthy’ and those who sought advice had previously found financial advice in another product area useful and so were happy to seek advice from that source again as it was trusted. The point is that customers are looking for a trusted source of advice particularly when it comes to potential equity release solutions.
Professional image
Trust involves a lot of things, for example, keeping promises, honesty, professional image and transparency. As the saying goes, ‘you never get a second chance to make a first impression’, and how the service and remuneration is explained is part of that first impression. Explaining to the client that the firm charges fees is a fabulous way of reassuring them that all concerned will be acting in their best interests. The reassurance comes from knowing that the firm will be more than happy to recommend they do nothing if that is in the best interests of the client - payment will be made whatever the adviser’s conclusion.
To highlight how customers view fee-charging advisers, we can look at the following responses which were made to a recent question on yahoo regarding how to find a fee-only financial adviser. It is interesting to note the accountant is viewed as particularly trustworthy. Responses included:
“What you call a ‘financial adviser’ most people call salesmen.”
“Even when you go for fee paying they still put you under pressure to buy.”
“My partners and I have always found that paying a fee to an accountant for advice has been better. The accountants are better qualified, more clued up and not trying to sell anything.”
The fact is that when people in any industry are paid by commission they are perceived to favour selling the products that pay them the highest commissions. Most IFAs and mortgage advisers will tell you this isn't true but unfortunately we also know that not all advisers are principled. Fee-charging could therefore be a way of distancing the firm from the ‘also rans’ in the ‘principles league’.
Review
Another reason to move towards fee-charging is the FSA’s Retail Distribution Review (RDR). This review gives very strong pointers of the FSA’s preference to extinguish all suspicion of commission-biased sales by removing any link between product choice and adviser remuneration. The RDR Interim Report published in April this year says: ‘Financial advisers would operate remuneration arrangements agreed with customers and determined without input from product providers’.
Although the RDR is not currently planned to cover mortgage and equity release advice it is difficult to see how any difference between the two product sectors would support the FSA’s desire to achieve consumer clarity and understanding across all its markets. Therefore we, in the mortgage market, should certainly assume there will be significant read-across from the RDR – one should assume this will happen sooner rather than later.
Business viability
Obviously the most important reason to charge fees is to ensure the long-term viability of the business. This of course is also in the interests of clients as it’s reassuring to feel that the firm they have used will be around in the longer term to refer to if needed.
Providing equity release advice cost effectively for all concerned is vital. Once the firm has decided on what they want or need to earn from the advice there are a number of areas to consider. Firstly, those intending to provide advice on equity release will have to achieve the appropriate qualifications and be authorised by the FSA before moving any further forward. This has an obvious initial cost but firms should also not forget the ongoing costs of maintaining competence and the cost of compliance. Firms should calculate how many days each month they will need to allocate to their own personal development and compliance work, for example, two days per month.
Equity release work can be time consuming and therefore reduce the potential to write business. The sales process can often be longer, taking more of an adviser’s time and if they are going to offer face-to-face advice they will have to factor in the cost of running a car, fuel and parking.
There are other questions to be answered:
· What proportion of the firm’s time do they wish to allocate to equity release advice?
· How many cases do they anticipate being able to write each week or month? This may not be a consistent number, it may grow over the year, so firms should work on an annual figure if that’s easier, for example, two cases per week over a 40-week working period means 80 cases per year.
Research
It is vitally important that firms carry out sufficient research in order to establish a realistic average case size and commission value. I would suggest that conservative assumptions would be an average case size of £60– £65k with commission rates at 1.25 per cent for lifetime mortgages and 3 per cent for home reversion plans. As an example, an average case size of £65k with a 90/10 split between lifetime mortgage and home reversion plan could produce a conservative combined average commission of £900 per case.
Adviser firms must also consider what marketing activity they will need to carry out. They may decide not to put any resource into marketing, however, marketing experts suggest that 10 per cent of a firm’s turnover should be spent on marketing costs. This may cover the cost of letters to inform the firm’s existing client base that equity release advice is now offered or a run of adverts spelling out the same message in the local press.
Sending out regular newsletters or updates supported by a website can also achieve sufficient interest but it should be remembered that all this costs time and money. Not forgetting the additional administration costs that will be accumulated. And finally, all advisers must consider their work-life balance – ideally they will be working to live, not living to work therefore detailing how many days they intend to work in the entire year will help develop the fee-charging structure.
Calculate fees
Once the firm has considered all of the above, and any other considerations that are specific to it, figures will be available and this is the time to calculate the sums. Having gained experience of this advice arena the firm may be able to calculate the average amount of time spent on each part of the process, for example, fact-finding, research, additional interviews, producing the suitability report, etc. With this sort of data the firm could go as far as calculating its fees on an hourly rate but initially its easier to take a more straight-forward approach and ‘play’ with the figures.
The following is a basic example based on the numbers given above and shows the type of sums the firm might want to achieve.
2 cases per week over 40 weeks 2 x 40 = 80 cases
Required income for firm £120,000
Divided by no of cases (120,000 ÷ 80) £1,500
This gives the firm an absolute bare fee base, i.e. the adviser needs to be earning £1,500 on average per case to achieve the income they need for both themselves and to cover their overall business expenses.
Having this basic level allows the firm to ‘play’ with the figures further or in a slightly different way, for example, they might want to earn £160k and therefore with 80 cases, the average per case required will have to rise to £2,000. Or the adviser might decide that they can work more hours per year and again the figures will shift to reflect the increased working time. This will impact on the number of cases the adviser needs to complete in each week. Advisers should also not forget that they may have to pay away a sum if, for example, they are receiving leads from other firms.
Moving into equity release advice is not a simple move for any firm and all those considering this option should be under no illusions of the work required to do so. However, there are a number of opportunities for advisory firms within this area particularly if they look at moving away from commission-based remuneration to a fee-charging structure.
In doing this, the firm must understand the needs of the business and the costs involved. However, this move will put the firm in a much more steady position, will help breed continued client confidence and take back a significant amount of control. We should also not forget that regulatory factors are moving the industry in this direction anyway – getting the business to this position before regulatory intervention demands it will also provide a competitive advantage and therefore makes the move even more alluring at this time.
