Restricted advice is not cheaper than independent. That is, at least, according to the FCA.
“We did not observe any material variation in charges between restricted and independent advice” was the regulator’s ruling in its recent data bulletin.
Combined with high-profile examples of restricted firm fees, such as Standard Life’s national 1825 charging 4 per cent upfront as reported by Money Marketing yesterday, on a purely costs basis the picture does not look great for restricted firms.
Let me be clear: the following is not a judgement in any way on performance or client service levels within both models, or whether one is better than the other. It is simply trying to answer the question of why restricted advice does not appear to have delivered on its potential to be cheaper than independent by limiting the markets it considers.
First, let us deal with the issue of compliance costs. Tighter product sets, particularly in restricted firms that frequently recommend their provider-owner’s own products, should naturally tend towards a reduced research and due diligence burden. At least in theory.
But this is not being reflected in lower client costs – when advisers and their trade bodies have repeated the mantra that every pound of regulation is an extra pound on the client ad nauseum since the dawn of regulation.
It is hard to escape the conclusion that restricted firms are simply not passing on reduced compliance costs to the end investor.
While the potential cost savings on something like professional indemnity insurance for firms which do not advise on venture capital trusts, enterprise investment schemes and the like may be minimal, there is still an argument they should be reflected in the client’s final bill.
That, or restricted clients are paying for a reduced risk of regulatory failure on their investments, but are simply not aware of it.
For the big restricted firms that are vertically integrated, potential cost savings get swallowed up at each level of the value chain, from discretionary fund management charges to platform charges and an adviser charge that a parent company may also take a chunk of.
The bigger the brand, the further the people making the pricing decision are away from the end client. In a large national with, say 70 advisers, it is highly unlikely those who set the fee level will actually have to sit in front of a customer and justify it.
Those layers of management cost money too. That scale businesses need appropriately large offices and an army of support staff is not really an excuse, though it is likely these high overheads, combined with the need to pay back shareholders in isolated cases, puts upward pressure on fees.
The client consensus
Clients do not shop around much. Maybe if forced to, restricted firms could lower their fees while staying profitable, stealing competitive advantage away from independents, but we just cannot be sure that would actually materialise or whether all firms – independent and restricted – would lower fees in lockstep and maintain parity.
In a way, the lack of price sensitivity that clients show to advice firms and their business models might be welcome. Obsession with fees can detract from the quality of the adviser relationship, client care and performance. If a client wants to pay high charges and gets amazing results, then good luck to them. But restricted firms have far from proved that they do.
In defence of restricted firms, if they review their panels on a frequent enough basis, the costs of doing so could quickly add up to something like what an independent might charge. Similarly, a lot of IFA firms do not take advantage of regulatory leeway that they do not have to take into account every single product for every single client on every single piece of work.
Ready for the regulator?
The problem is the FCA is not, and should not be, in the business of dictating what firms should charge.
As soon as a regulator determines an “appropriate” pricing level for the advice market, you would see even more clustering around certain values than you already do, and it would still bear scant relation to what clients are getting.
But there still does not seem to be any compelling reason that a properly structured restricted firm could not deliver cost savings, and many just are not.
While expensive but shoddy service is not limited to the restricted community, higher cost has to be matched by higher returns or better service. Performance has to justify fees; the regulator could hardly have been clearer in its recent work on the asset management market.
The gauntlet is now down in front of the restricted market to live up to its promise.
Justin Cash is news editor at Money Marketing