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Why aren’t restricted firms cheaper than IFAs?

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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.

Cheaper compliance?

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.

Vertical integration

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

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Comments

There are 21 comments at the moment, we would love to hear your opinion too.

  1. When one talks of Restricted, it is rather a blanket statement. Vertically integrated restricted firms have high fees as they have more mouths to feed (as one example and I for one am not a fan but….). Small restricted firms are another animal altogether and many will not vary in structure (fees or business-wise) to Independent firms and so I think that your article heading and the theme in general is rather unfair.

  2. Answer: Because they became restricted to make more money. Less research and admin and less concern to provide a truly holistic service. Money first anything else second. Simples.

    • I agree and as a restricted adviser (by way of product exclusions only) that has, for many previous years had my margins cut back buy increasing regulatory costs, you bet your bottom dollar I am doing this to make more money. Almost back to where I was in 2011 and slowly clawing my way back to decent margins. For the vanilla client who is only looking for vanilla product lines (ISA/OEIC/pension/etc) then there really is no difference between the type of restriction I placed upon myself and an IFA. The IFA does not need to research more products than I do nor do they provide a more holistic service than me either. I increased my fees as at RDR to take account of the time out of my business I took and to take account of how much more “qualified” I became after the RDR. No different to any other profession – the higher up the ladder you go for advice/service they more you pay. Just right too. I am not here as a guider, or social worker – I am in business sole to make money by providing a service that those who use it, must pay for. If I run across someone who needs advice on a product line (say VCT over EIS) then I send them to yell.com however this has only happened once so far.

  3. Both Platform charges (for their Panel Providers) and Discretionary Management Fees (for their Panel DFMs) are significantly lower than IFA World through Intrinsic. This is a direct saving to the client.
    This may not been brought out in the FCA report as the focus may have been confined to the level of fees Restricted Advisors charge.
    IFAs often champion their ability to offer everything to a client Vs Restricted advisors. I don’t hear them directing clients to Restricted advisors as they can’t offer the best terms on a Platform or a DFM. I personally don’t have an issue with either model. Just think Press appears a little one-sided.

  4. So we’re in Groundhog Day territory again. Commission and related sales based ‘advice’ was apparently ended through the RDR. Large ‘vertically integrated’ firms however are simply doing what they’ve always done but dressing it up differently. 3,4, or 5% is still that figure irrespective of whether it is called commission or anything else and it’s a charge for selling a product. That isn’t an advice driven process!

  5. I thin you mean why are the likes of SJP and Openwork etc not cheaper (and not picking these out exclusively)?

  6. Correction: PI costs do not decrease by restrictions on products advised: since we adopted this mantra our PI costs continue to rise year on year; so no saving to clients, just more costs we have to absorb!

  7. Harry you are so wrong !!! were all paying to much for Pi and regulation You know that .Restricted means if there are products that you don’t consider for your clients on basis that they are to high risk does not mean you are not taking a holistic approach ,Holistic means taking consideration off all client needs plans existing Investments risk and so on , I personally make no more , and save nothing by being Restricted but I know my client and the age range on average 60plus that many types of investment are just totally unsuitable for them .Harry it must be a joy being so perfect .

    • Kevin

      Unfortunately it has only been since my (semi) retirement that I have had the opportunity to put my head above the parapet and truly realise how perfect I really was! I know now that I should really have charged more and that even a 25% uplift would have made me extremely competitive.

  8. Having gone restricted a few years back, the amount of work I have to do in terms of which ISA or PP to recommend to new clients has vastly reduced and, as a result, I can pass this saving on. So, for me, being restricted IS less expensive than WoM.

    That said, in certain areas I am still WoM and, if absolutely necessary, I could still do the WoM thing in ANY area. But the vast majority of clients neither need or want to have to pay for WoM research. This (for example) is the platform I recommend, these are all the reasons, these are a few reasons why I’m not inclined to recommend most of the others and these are the benefits to you Mr Client. What’s not to like?

    All that remaining resolutely WoM means is that everyone gets it thrust upon them whether they actually need it or not. Where’s the sense in that?

  9. I agree with Sid here clients get more for less with restricted advisers.

  10. Good article. Whilst the regulator won’t get involved in adviser charging they do have the power to get involved at a macro-level if they believe that the advice market isn’t functioning in the consumer interest. For example, the FCA has recently published its review of the Asset Management market concluding that there’s a lack of genuine competition in some areas. They are now seeking input from the AM industry to address this issue and have created an expectation that regulatory action will follow. So, I guess the real concern for the advice industry is whether the FCA will come to a similar view as regards the levels of competition within the market. This article seems to suggest that there is already some evidence to support a view that competition is indeed weak and that the consumer is the one that is paying the price. I’m sure many restricted advisers are passing on the savings made to their clients but, from a macro-level, it’s easy to see how the regulator might come to share the view expressed in this article, i.e. that there is a lack of real, effective competition within the advice market more generally.

  11. @Sid James. Yes the platform costs are reduced through Intrinsic provided you use the in house options but as an IFA I can still access cheaper (and better) options elsewhere in the market and I believe the same to be true of the DFM option. It is extremely unlikely that as an IFA I cannot obtain a suitable or better option for a client elsewhere in the market. It would require a special feature only available on that platform or from that provider that the client must have for me the have to recommend that option and then be dearer that a Restricted adviser.

    Given that why would I want to refer a client who has come to me for Independent Advice to a Restricted Adviser.

    I recall meetings where moving to Restricted and getting lower platform costs was then trumpeted as a means to increasing the adviser charge and maintaining the same overall costs to the client i.e. don’t pass on the saving pocket it yourself. I’m not saying you do that but I know some did.

  12. because FCA fees, PI fees, Compliance Fees etc etc are the same

    • Hahahahaha

      I have been monitoring this thread since it opened and I congratulate you Mike, the penny drops faster for some it seems !

      If every-one pays the same, ipso facto they will charge (roughly) the same

  13. I agree with Darren Cooke. A prime example is fixed platform costs that are unlikely to be available on a panel. Many direct offerings may also be beneficial to clients.

    I had OMW on the phone just this week aggressively trying to protect business that will be lost to a fixed fee platform offering. It is happening, and it will speed up when Vanguard go retail in the UK.

  14. Darren/Rob
    The Platforms and DFMs are widely used by IFAs (more IFA business than Restricted), therefore presumably must offer the right thing for some clients. Good point where fixed charges are an issue over % Platform Fee ie on large cases. Where this is the case, a Restricted advisor may refer out (unlikely) or use a non-panel solution. (some do some don’t).
    I certainly wouldn’t set my research filter on cheapest solution only. For example, does Vanguard offer targeting of tax efficient income on drawdown automated through selection of combination of Tax Free Cash and taxable income to meet personal allowance thresholds? This may be of great value to certain clients, no value to some.

  15. Sid James. Under the Mifid ii rules, Articles 52[1] & 53[3], an adviser will no longer be able to offer both Restricted & Independent advice. Therefore, if the definition of restriction is “panel of products”, a restricted adviser will no longer be able to go off that panel.

    • Technically that’s correct in that the same individual adviser cannot provide both restricted and independent advice. However, the same firm can if two different advisers are used.

  16. Heather Hopkins 6th January 2017 at 9:23 am

    I would the cost of the advice to come down (much) for a restricted offering as the focus of the advice process is on creating a financial plan not product recommendation. That said I’d expect the cost of the platform or investments to be lower depending on what restrictions are in place.

  17. Having spent nearly 20 years working mostly in compliance for both types of firms, I would make the following observations.
    1.) Most people that label themselves IFA didn’t and still don’t look at ALL the options in the market when giving advice, simply because they do not have sufficient knowledge and tend to work within their “comfort zone”, yes there are those that do, but I’m here talking about the average.
    2.) Most IFA’s and Paraplanners use the tools available to them to research the “market” i.e the likes of synaptics, but they always tailor the filters to make the research say their “preferred providers and funds”, whereas restricted firms (not the likes of SJP/1812) do their quarterly research and consider the whole market properly and add/take away products/funds appropriately.

    So the reality is that for most IFA’s and restricted firms (with CIP’s) their is actually very little difference in the research burden, but maybe the restricted firms on average tend to be slightly more honest about their research process and admit that they have preferred providers, products, funds etc.

    From a regulatory and PI cost, there is no difference as far as I can tell between “IFA’s” and restricted, so added with the research burden being similar, the only cost differential comes in with areas such as report writing and being able to templatise more, however even there, every IFA I have worked for, has template sections for the products/providers they recommend on the daily basis, so the reality of the situation is, that there is virtually no difference and hence the charges tend to be the same.

    I would also add, that is there some reasons why good quality advisers (and there are many in each area) should earn a decent living? Given the amount of money they can save clients, or make them, is there some moral reason why someone should be allowed to be a manager in the state sector and earn £150kpa, whilst a good adviser shouldn’t be able to?

    Stop trying to apologise for people that are good making a good living.. If you don’t want to, then that’s your choice, but why should those that realise their own value to clients not be able to make good money?

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