Adviser  >  News  >  December 2008  >  Financial Adviser’s Fee

Financial Adviser’s Fee

We already write most of our Pension Portfolio and Income Release business using the Factory Gate Pricing feature, but we’ve seen a surge of interest lately in the Factory Gate Pricing feature of our Retirement Solutions GPP product as well. Our name for this feature is Financial Adviser’s Fee (FAF) and we thought this would be a good opportunity to explain to you its benefits in the GPP context.

What is FAF?

FAF is commission with a clear charging structure. On the basic model, if you took £360 remuneration for each member in a GPP, we would pay you £360 per policy at outset and cancel £30 worth of units each month in the first year. Clear and fair: for every £1 of remuneration, the client pays £1. Contrast this with a 1% AMC or Active Member Discount model where neither you, the provider nor the customer knows what the client will actually end up paying for the commission taken.

FAF can also be taken on single premiums and transfers, as trail commission on regular premiums. For up-front commission on regular premiums, the FAF charges can be spread over up to 5 years.

The beauty of this approach is that because we’ve separated the commission from the base charge, the ongoing AMC is a nil commission AMC.

What’s the benefit of FAF for me?

The benefits for you, the adviser, come in three forms:

  1. Flexibility: FAF allows you to take commission at a rate you specify, up to a maximum of 50% of a member’s first year’s premium (reducing in the last few years to retirement). This puts you in control of your finances as you’re putting a value on your time rather than having a provider telling you what they’re willing to pay you. You can set the FAF to be either a fixed amount per member, or a percentage of their premiums.
  2. Business retention: Because we’ve charged for commission separately, the ongoing AMC is a low, nil commission AMC making it more difficult for another adviser to poach your client.
  3. Future-proofing: With the Retail Distribution Review and Personal Accounts looming, the pressure is on to have transparent charging structures with low ongoing charges. FAF, coupled with our GPP, ticks both of those boxes.

What’s the benefit of FAF for the client?

The benefits for the employer comes in two forms:

  1. It rewards medium and long-term staff members (see projections below of a £167 per month premium with a 7% investment growth assumption). AMC-based commission over-charges long-term members to subsidise the members that left before their commission was repaid. FAF removes this subsidy.
  2. Cost control – this enables your remuneration to be deducted from the employer’s contribution rather than requiring a fee from the employer on top.
Projections of a £167 per month premium with a 7% investment growth assumption
End of year 15% Initial 15% FAF 30% FAF

1

2,070

1,760

1,450

2

4,260

3,940

3,610

3

6,570

6,260

5,910

4

9,030

8,730

8,350

5

11,600

11,300

10,900

10

27,100

27,100

26,600

11

30,800

30,900

30,300

12

34,600

34,900

34,300

13

38,700

39,200

38,500

14

43,100

43,700

43,000

15

47,700

48,500

47,800

16

52,600

53,600

52,800

17

57,700

59,100

58,200

18

63,200

64,800

64,000

19

69,000

71,000

70,000

20

75,100

77,500

76,500

25

112,000

117,000

115,000

30

160,000

170,000

168,000

AMC

1.05%

0.68%

0.68%

RIY

1.1%

0.80%

0.80%

These figures are only illustrative. An assessment of your client's needs must be confirmed before a recommendation can be made. Key features, including a projection which is personal to your client's circumstances, must be provided if a recommendation for an investment product is made.

Also, if FAF is limited to the employer’s contribution, from the employee’s perspective, all their own contributions goes into their pension – the employer pays for the cost of advice. We can understand though, that with greater transparency may come more questions. We’ve designed an aid for employees that you can use to help explain the benefits of FAF to them.

Contact us

If you want to talk with us further about Financial Adviser’s Fee or see an example of how Financial Adviser’s Fee can produce better projections for your schemes, contact your local Scottish Life consultant. We'll be bringing you more on Financial Advisers Fee and how you can use it in your corporate practice in future releases of our IFA newsletter.

For professional advisers only