Recent suggestions that the FSA might introduce decency limits of 3 per cent for initial adviser-charging and 0.5 per cent per annum for ongoing advice were met with horror by many in the market.
It is not hard to see that, if enforced, this would remove any possibility of it being economic for advisers to look after the interests of everyday consumers. In practice, I think it would eliminate any adviser distribution of individual life and pension products.
Life and pension business is currently too manual a process to operate on those margins and advised investments would inevitably all be written via platforms for the reasons outlined below.
This suggestion, which did not appear to emanate officially from the FSA, has the hallmark of pre-Budget rumours, where governments float the idea of really bad news so the electorate is relieved when actual tax changes are not quite so bad. I suspect the FSA is softening us all up for something it will be really important to resist.
This does, however, raise a pertinent question. What is the right price for advice after the RDR?
This is actually an exercise my office has been working on for some time. Although we only have preliminary findings at present, given this issue has become topical, it is worth sharing our results so far.
As anyone with any experience in the adviser world will understand – although, sadly, it would appear many at the FSA cannot grasp – the cost of carrying out exactly the same transaction between different product providers varies dramatically due to variations in service levels.
If a life office is still actively looking for new business, chances are you can expect a reasonable level of service. For those who have made a significant investment in e-commerce, you might be able to keep your advice costs below 1 per cent. If the provider is a closed book, however, our investigations suggest the costs could be considerably more.
Ultimately, the objective of this work is to build up a detailed picture, ideally provider by provider, contract by contract, of what the typical cost of ongoing servicing contracts ought to be. This, in turn, should provide solid evidence that can be shared with the FSA and others to inform any planned limits on decency rates.
In measuring the true cost of advice, surely an IFA needs to charge for each and every action in the process of advising the client. And this is where the problems begin.
The administration service from many life companies is so poor that if the IFA passes on all the costs it has incurred in obtaining the information necessary to provide advice, the cost to the consumer becomes prohibitive.
Our cost analysis has been achieved by working with advisers to map in detail all the activity in respect of different types of contract and then compare the adviser’s operating costs to understand the profit or loss in each individual contract.
Although only at the early stages of our research, we are beginning to see evidence that the true cost of advice to consumers should be as high as 1.8 per cent of the assets under advice where providers employ the most Dickensian of processes and, sadly, many fall into this category.
There seems to be a real lack of understanding among the life insurance provider community that today’s advisers and their clients have viable economic alternatives to business methods more akin to the 1950s than 2010.
The platforms that have emerged over the last decade represent a far more cost-efficient method of managing clients’ assets.
One could argue that where advice costs are above a certain level, those assets should be excluded from the advice process. This sounds fine until something goes wrong. Even Standard Life managed to create a cash fund that was considerably more volatile than expected. Is it not prudent to keep a far closer eye on exactly what is going on under the covers of closed-book investment products?
At a time when the platform community can easily provide the requisite level of detail to advisers on all their clients, on a daily basis if necessary, the life and pension providers are still struggling to make a messaging system that provides data on individual contracts on request and operates in a scalable fashion.
The process known as contract enquiry was designed to meet adviser requirements a decade ago,and even this has really only been widely adopted by a forward-thinking handful of life companies.
For those with closed books, the operating method seems to be to give the customer as little information as possible and, if they appoint an adviser, to make it as difficult as possible to obtain the necessary details to offer advice to a modern standard.
It is now my opinion that there is very little time left for those life companies that are not prepared to see at least two-thirds of the investments they hold migrate away to radically raise their game. It is time to recognise that for life companies to go head to head with platforms, there is a need for an entirely new servicing and support model – one that provides access to a far wider range of data on investments automatically and probably on a regular basis.
Through this research process, we plan to identify objectively those providers with which the real cost of doing business is too high. At the same time, we want to help advisers form a clear view of what the fair cost of advice should be to their clients. This must be essential for the ongoing financial stability of the adviser community.