In our latest Guest Blog, Martin Tilley, Director of Technical Services at Dentons, looks at why he believes time costed fees still have a place.
With the number of SIPP (Self-Invested Personal Pension) providers increasing following the regulation of SIPP’s in 2007, the struggle to obtain / retain market share saw products becoming increasingly competitive.
One of the ways an intermediary would ‘show added value’, was researching and finding the cheapest SIPP product on the market for their client’s needs. Cost assessments were sought and market demand was for a menu of fixed fees providing certainty and direct comparisons between providers. Unfortunately this focus on fees often became a fixation, both for the intermediaries and for providers alike many of whom strove to write volume business at very low charges with slim if any profit margins.
However, the regulators recent thematic reviews require a significant tightening of due diligence process for many providers and thus, quite a step up from the principles based regulation and treating customer fairly basis that operated from 2007 until quite recently. With the requirement to also increase capital adequacy, attention is now focussing on financial strength and service rather than pure fees.
Fixed SIPP fees v time costed fees
I was therefore interested to read a recent article stating that fixed fees were one of the things an intermediary should look for when assessing a SIPP provider and time costed fees were best avoided.
Whilst I am in agreement that for certain routine jobs such as establishment, transfer and purchase of standard classed assets, which as it happens make up the majority of SIPP administrators duties, fixed fees are appropriate, there are areas where I feel this charging basis simply does not work.
Where a SIPP provider operates at the more specialist end of the market and includes as acceptable assets commercial property, private equity and intellectual property, no two cases are ever the same and it can be argued that a SIPP provider will need to spend a differing amount of time dealing with the due diligence and administration of accepting each individual asset.
Is it not reasonable that they should charge a suitably differing amount for each transaction based on the time taken?
To not do so requires the setting of an ‘average’ fee, which by definition will favour those whose transactions are more complex, effectively a cross subsidy from those whose transactions are far more simple.
A ‘margin’ may also be built into this average to allow for selection against, which will inevitably occur when an intermediary realises the complex cases can be handled at an ‘average fee’ whereas a simple case will more often than not be handled at a lower than average cost by a time costed provider. A time costed provider can more accurately build into their rates allowance for their costs and what is required to maintain profit and meet capital adequacy requirements.
There is also a service element. Where a complex transaction extends beyond average cost, where is the incentive to speedily complete it when no further remuneration will be forthcoming? Better expend that time on a new transaction for which a new fee will be paid. A fixed fee may also lend itself towards a fixed service.
Some provider’s will tailor their services to fit in with those provided by the clients other professional advisers, and where this is the case, services such as property rental invoicing and VAT reclamations that are not always required will not be charged for. For circumstances such as these, time costed fees make a compelling point and a convincing argument for treating customers fairly.
Martin Tilley, Director of Technical Services at Dentons, can be contacted on 01483 521 521 or by emailing email@example.com