Undercharging : the industry’s familiar villain

Advisers and agents who undercharge do a disservice to the industry and may also signal their lack of ability.

We are currently in the midst of a price war in the industry where clients will move between service providers depending on price. But are service providers who offer lower rates providing a good enough service?

Historically, it seemed to be industry practice that advisers would uniformly charge the maximum commission provided in the recommended commission scales. This was widespread and commonplace in spite of the commission scales being recommendations only.

Fierce competition

Once the market became more competitive, some financial advisers took to competing on fees. Clearly, this is but one of a range of elements where advisers can differentiate themselves from other industry players.

Other options can include the level and service quality provided as well as the type of relationship they form with their clients.

A move towards lower rates is, in itself, not a bad thing; and it certainly helps the consumer. However; when fees are cut to an excessive level, the result is poor service where both the industry and the consumer suffer.

Would you take second best?

I would like to make an analogy to the medical profession. How comfortable would you feel getting a cut-price operation? What will you think about the ability and quality of a surgeon who is prepared to lower his or her fees: that the operation might be suspect? That proper procedure may not be followed? That you may face a higher risk of infection?

If a financial adviser undercuts on price, the concern for that advice is no different to the situation of a doctor who undercuts on price. Lowering fees indicates that an advisor believes the advice given is of a lower value, and clients will see it that way too.

Explaining rationale

There are several reasons why an adviser will opt to provide cut-price advice:

• Advisers may be desperate. They may have so few clients that they will do work for any amount. However, advisers who want to stay the distance need to have a sustainable client base. To achieve this, they need to provide a quality, reliable service and build a long-term relationship.

• They may be unqualified. Before the current more regulated environment and with low barriers to entry, anyone was able to set themselves up as a financial adviser. Today we have far more controls and regulations in place, requiring advisers to be adequately qualified and licenced to practise their trade. If still not fully compliant with the regulatory requirements, advisers may opt to charge a lower fee.

• They may not be around for the long term. Some people enter the profession with the aim of making a quick buck. These fly by night operators are what I refer to as hit and run practitioners, and they may be in it for a brief period only. These are the advisers who typically give the industry a bad name as they do not play by the rules.

No service here

An adviser who is no longer in business when a client needs to make a claim on their policy is certainly not providing the service the client signed up for. And if they gave bad advice, they are not around to pick up the pieces.

A fair level of commission is essential to preserve and protect the advice industry. Quality advisers need to be able to generate a sustainable income or they will leave the profession. If it is made too hard for them to earn adequately, we risk losing them to another industry and the advice sector will be left with those of poorer quality.

It is better to encourage a fair and sustainable pricing structure in order to ensure that the best brokers and advisers remain in the industry.