The regulatory perspective
First, it is worth reminding ourselves what the original intention of the regulator was in introducing adviser charging. The FCA’s thematic review on how firms are implementing the RDR states the reforms were aimed at ensuring advice is free from bias and costs of advice are clear to consumers.
The FCA went on to say that while firms have made a lot of progress, some firms were not providing clients with charges in cash terms, not being clear on ongoing services and not providing their generic charges in good time before making a recommendation. It was also concerned about whether some firms were actually independent and whether they were adequately describing the nature of a firm’s description.
A diversity of charges
If, as is widely reported, most advisers went into the RDR charging, on average, 3 per cent initial charge and 0.5 per cent ongoing, what has prompted advisers to change the level of their charges and, in some cases, to unbundle their charges by separating out advice, implementation and investment management? Our contention is most advisers have implemented the changes on the basis of believing they need to follow market trends and/or a wish to increase profitability. Few firms that we have asked have based these changes either on client research or on the cost of delivery.
One result of the RDR has been a reduction in the level of the initial charge and an increase in the level of the ongoing charge. An unwelcome and in some cases an unexpected consequence has been cashflow issues. Where there has been, for example, a move from a 3 plus 0.5 to a 1 plus 1 model, the immediate reduction in income has been considerable.
There is also anecdotal evidence that some advisers are charging “what clients will pay” and this, aside from making it challenging to budget arguably has treating customers fairly implications in terms of ensuring consistent outcomes.
The move by an increasing number of firms to charge a specific fee for a financial review and implementing the recommendations is positive but as long as each element is costed and charged for appropriately.
There has been a practice of charging too little for the financial plan and this is often because the actual cost of doing so has not been calculated.
The tendency to charge an arbitrary sum on a contingent basis where the initial charge is bundled, that is, where the advice and implementation is combined, is widespread.
As far as ongoing advice is concerned, most advisers seem to have increased their charges to an average 0.75 per cent and in some instances to 1 per cent.
Advisers cite increased regulatory costs and the need for more sophisticated systems tools as an explanation for increases to charges but only a few firms have based these increases on actual research and costings.
A minority of advisers charge for their services on a time-costed basis. Once again, the level of hourly charge appears to have been arrived at based on either “what the market will bear” or using the level of charges published by other firms.
Documenting what is agreed
The FCA has talked about the importance of having compliant and easily comprehensible documentation. In relation to adviser charging, clear documentation is evolving within adviser firms but this is not being always being reflected in client agreements. These need to be reviewed regularly and updated as necessary.
Some firms have chosen to use client engagement letters that are sent to clients after the initial meeting to set out the services being provided and to seek clients’ agreement before starting work.
This approach, typically used by accountants and solicitors, arguably provides greater clarity, client commitment and a good audit trail if there needs to be a review later on regarding what work has and has not been done.
The first unresolved adviser charging issue is the level of cross-subsidy that continues to exist between wealthy clients and those with less to invest. It is still the case that the former help fund the cost of advice of the latter. This is likely to become more of an issue over time as wealthier clients increasingly question what they are getting and what they are paying for. A gradual move to overall capped or flat charges at least for wealthier clients is likely.
Even where firms focus on the mass affluent, there is no evidence of the capping of charges and this is probably because few firms review client profitability on a case-by-case basis.
The second is what the adviser charge is based on. A minority of advisers are seeking to levy the adviser charge based on the assets they advise on, not just those that actually invested via the adviser.
ºThis poses interesting questions, not least in relation to the professional indemnity insurance position, and the consequences need to be carefully thought through.
The third is the withdrawal of legacy trail commission which seems inevitable. Collectively, the amounts may be considerable but on a client by client basis they maybe too small to pursue economically. There needs to be a strategy should this come to pass rather than to “hope it will blow over”.
Finally, there is the issue of facilitation. This is the dominant mechanism for paying adviser charging but over time more insurers and fund managers may prefer to leave it to platforms to provide this service and intermediaries need to plan with this in mind. If platforms become the default choice, this could create an issue for the smaller investor seeking advice, where a platform does not provide the optimum vehicle for investment.
Firms need to be ready for a variety of post-RDR remuneration permutations and developments. They cannot expect the position to remain unchanged and need to plan for various possible developments to ensure their clients’ preferences are met based on full and effective disclosure.
Robert Reid and Roderic Rennison are directors of The Ideas Lab