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Considerations for a post-RDR world : Setting your fees

07 December 2017 Jacques Coetzer, Sanlam
Jacques Coetzer, General Manager, Personal Finance, Broker Distribution at Sanlam.

Jacques Coetzer, General Manager, Personal Finance, Broker Distribution at Sanlam.

As the various phases of Retail Distribution Review (RDR) unfold over the next two years, intermediaries need to start positioning themselves appropriately for a new “advice fee” world. Successfully making the shift from commission-only to fee-based charging – and building a sustainable practice in the process – requires careful research and planning. In particular, when deciding on fees, brokers need to find the balance between profitability and offering value, cost-effectively, to their clients.

Jacques Coetzer, General Manager: Sanlam Personal Finance: Broker Distribution, says with multiple market factors at play, value needs to be carefully calculated. “Clients will quickly look elsewhere if they feel that you are charging too much and not giving them fair value.”

To find a realistic benchmark to work from, talking to clients about their expectations and doing research into more-or-less what other practices are charging can be useful. This will give you a good foundation from which to determine appropriate pricing.

So what are the structures within the RDR proposal in terms of services intermediaries can render and charge for? The first is the advice process. This involves conducting a financial needs analysis, constructing a financial plan and making recommendations based on clients’ priorities. There are various ways to structures your fees – a retainer, charging per hour, or charging a project fee per service needed, among others, each of which have their own pitfalls and benefits. There is also an option to introduce different ‘packages’ which suits the needs of different types of clients, and charging per package. The fee charged for advice may be agreed to between the intermediary and the client. Then secondly, there is the implementation of this advice – in other words, buying the products recommended from the selected product provider. The future dispensation will still have commission on life and risk, but not for savings and investment products. Then there are the activities intermediaries render on behalf of the provider, for which a service fee can be charged.

Coetzer says that South Africa implementing RDR some years after the UK has allowed us to learn from the mistakes made in that country. “One common mistake is not charging for stage one, the initial needs assessment and plan, which can be a noteworthy loss. Often the broker tries to recoup this fee by hiking up prices on products which can lead to the products being over-priced.”

He says that in order to the get pricing right at each phase, brokers could consider the below elements during the process of setting their fee:

1. Get a very firm grip on your business costs.

Have a very precise idea of, for example, the costs of your office space, petrol to see clients, personal assistant’s salary, catering bill, electricity bill and taxes. A well run business pays attention to all of these things so you are able to be realistic about profits.

2. Differentiate yourself through your value proposition

Ultimately charging a fee means that clients need to understand and be willing to pay for the value you offer. Be precise about what you offer, and package it in a way that is useful and attractive to clients. In addition, different clients will be able to afford different levels of service. There could thus be advantages to delivering your value proposition in different packages, and charging accordingly.

3. How will you handle the admin in terms of collections and invoicing?

Have a clear plan in place for handling defaulting clients. Avoid this scenario by having legal contracts in place.

4. Look for ways to ensure regular income to help cash flow and ensure costs can be covered.

Risk products which still see intermediaries earn a specified commission upfront and the rest paid out over the policy term or an ongoing retainer can secure a certain level of service on a monthly basis. If you opt for the retainer route, make sure you clearly define what is included on the retainer and what is not. This will help you avoid spending time doing things you are not compensated for, which can make the retainer unprofitable. Also ensure to review your fee on an annual basis, which will also give you an opportunity to revisit your services offered.

5. Get your invoicing systems in place and tight
Invoicing, collecting and contracting are vital to keeping your business afloat. There needs to be an upfront contract stipulating the terms of the client and intermediary agreement. In the past, the insurance provider handled the entire process, including fee collection and the legal ramifications of clients defaulting on payments. Now, this will be up to the intermediary, which presents an opportunity for a closer relationship with a client.

6. Consider investing in a good accountant from the outset.

Handing over the financial management of your company to someone else will allow you to focus on your core skills of giving financial advice to clients. They can take care of profitability and advise on pricing models, cash flow, taxes, among other things.

The key is to start planning ahead. If you haven’t done so already, it may be worth spending some time dedicated to upfront planning and research, which can benefit you greatly in the long run.

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