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Blog: Advisers should justify charges uniformity

Two real themes have emerged since the FCA published its business plan last week: competition and charges.

The two, of course, are very much intertwined, the regulator’s theory being that focusing on competition will naturally drive value for money.

For platforms, the regulator wants to look at the client acquisition and retention process. But for advisers, the FCA may have a way to go to dislodge the firmly established price dynamics in the sector.

Reactive reasoning

The evidence suggests advisers have not flexed their fees based on competitive or other pricing pressures.

Embracing technology to speed through the advice process should have resulted in significant cost savings. Imagine how much the market as a whole should have saved just through the birth of platforms, let alone the mass use of tools like videoconferencing and back office technology.

Last October, the FCA found average charges for initial advice are 1 per cent minimum and 3 per cent maximum. For ongoing charges, the average rates are 0.5 per cent minimum and 1 per cent maximum.

According to the FCA, the median initial charge for investment advice below assets of £10,000 is 3 per cent, the same as it is for £20,000, £30,000 and £50,000 pots, and does not vary by firm size either.

At £250,000, 90 per cent of firms still charge within 2 per cent of each other for initial investment advice.

To be fair to advisers, price clustering is a prominent feature of active equity funds too. The FCA found “considerable” grouping around 1 per cent and 0.75 per cent in its asset management market review.

But when it comes to financial planners, the regulator ruled that charging at the same levels “is consistent with firms’ reluctance to undercut each other by offering lower charges.”

Lining up with levies

Advisers say they have to set their fees as they do is because of the levies they pay to the regulators.

If advisers are adamant that what they charge is so dependent on regulatory costs, and that “every pound of regulation is another pound from consumers’ pockets”, then clients should see their charges decrease when FCA bills go down, not just increase when they go up.

Between 2013/14 and 2014/15, fees for the A13 fee block, which covers advisers, fell from £83.6m to £68m. That is a drop of 18 per cent. While Financial Services Compensation Scheme levies for life and pensions advisers have increased in the last two years, this year’s levies for investment advisers are £14m lower than they were in 2009/10.

Besides, you cannot put a pounds a pence figure on the value having a compensation scheme for consumers that have been wronged has on reassuring consumers to take control of their finances, just as you cannot put a pounds and pence figure on how many entrepreneurs would not have taken the risk to get out of the starting blocks without adequate regulatory protections.

If banks say, were lobbying that if you reduced their capital adequacy requirement by 50 per cent, they would promise to cut fees for clients in half, they would rightly get laughed out of shop.

Adding up the numbers

This all begs the question of exactly why the standard advice charging models are set as they are. Why do so many charge 0.5 or 1 per cent ongoing? Why is 3 per cent upfront the benchmark? Everyone has different costs, and – as this magazine frequently points out – everyone offers a different service and different value for money.

“High charges” are not necessarily a bad thing.

But would clients and external observers benefit from a proper breakdown of exactly how much of their fees went where – building costs, staff salaries, IT cost and all the rest – not just fund, platform and discretionary management charges?

Otherwise, Joe Public might believe you charge what you do just because the man down the street charges it too. He might well ask why more people are not charging, say, 0.25 per cent ongoing, for a bare bones service, or 5 upfront, for a gold-plated one.

Advisers have to face up to some of this lack of competition on price and that, with consumer awareness of the sector still painfully low, they will have to take the lead.

Eventually, clients may end up voting with their feet for firms that do get out in front.

Justin Cash is news editor at Money Marketing. Follow him on Twitter: @Justin_Cash_1

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Comments

There are 11 comments at the moment, we would lover to hear your opinion too.

  1. Justin. Interpreting data is never easy and I’m not entirely convinced that the figures produced are that worthwhile. Pre RDR advisers (tied & independent) to a large extent had their earnings pre-determined by product providers. Unshackling post RDR meant advisers could go out and charge to reflect actual costs and profit requirements; yet despite recent reports on how well paid advisers are, many firms still generate less than 5% net profit. Something somewhere doesn’t quite add up!

  2. James Marchant 2nd May 2017 at 12:51 pm

    Absolutely Kevin. Profit margins in the IFA space do not support the assumption that advisers are overcharging or that there is margin for advisory fees to come down significantly. If anything we are upping our fees in certain areas because we are too cheap!

  3. I think most of us will just continue to charge our clients a suitable price for the professional services we provide. Enough to cover our costs, make profit and add value to our client’s lives.

    I don’t think we need to worry ourselves about any perceived uniformity

  4. Our baseline costs aren’t going down – wages, property costs, license fees and regulatory fees all consistently head upwards – regulation isn’t getting more simple and the range of potential solutions gets ever broader and therefore the ‘time spent on advice’ is increasing likewise.

    Add all this together and ‘time spent on advice’ x ‘time cost of advice’ = rising cost of advice.

    We’d love to reduce the cost of our advice but given the letigious nature we live in and the spurious CMC enquiries we have received, that’s unlikely too.

    Having said all that, if a client has to pay circa 3% to benefit from everything they benefit from, advice wise, I genuinely don’t feel that’s overly high – both in a relative and absolute sense. Even ignoring the potential benefit of ‘better’ investment selection, a simply bit of tax planning can easily offset that!

  5. “Advisers have to face up to some of this lack of competition on price and that, with consumer awareness of the sector still painfully low, they will have to take the lead.”

    The FCA has largely created the current market for advice through RDR. Advice is now scarce and prices are higher. How many times were they told this would happen? On the other hand, standards are higher. If I have a skill that attracts a premium why should I voluntarily charge less for it? This is human nature and economics at work.

    The problem for regulators (and many financial commentators) is that they want everyone to drive around in BMW/Mercedes/Lexus but pay Mondeo money. I’m sorry, but life isn’t like that and the market will decide what can happen and human nature will do the rest. The regulators of the past and present have all tried to buck the market with rules and they have all failed (prices invariably went up). No doubt they will try again because next time it will be different. Cue FAMR.

    That doesn’t mean that there isn’t some competition and people like Nick Bamford will charge a “suitable price for the professional services we provide.” Which boils down to how much profit he wants, and is able to charge. His ‘reasonable’ will be someone else’s ‘extortionate’ and another’s ‘giveaway’. That’s down to human nature and the market, neither of which our esteemed regulators and politicians seem to have a clue based on their actions.

  6. Graham Bentley 2nd May 2017 at 8:03 pm

    Remarkable how like commission rates 3% up-front (initial) and 0.5% ongoing (trail?) are. But we should remember that trail was never paid to fund ongoing service; it was originally introduced in 1987 by Invesco amongst others, to encourage sales of regular premium PEPs. Within 5 years you couldn’t sell retail unit trusts without it. More pointedly the fee was related to investment advice, not financial planning.

    Today it appears many advisers conflate investment advice with financial planning. That’s something I suspect the regulator will be looking at in the follow up to MS15/2.2.

  7. I could have sworn the rate for most local plumbers were similar to one another, same with the local solicitors…… could be because it’s a market rate & not a command economy.
    As Grey Area pointed out, the FSA were warned that RDR would push prices up and funnily enough…. it has.
    That could be because those at the coalface actually know their arse from their elbow and have actually done something other than go straight from school/uni to a big employer who commands us and tells us what we must pay and sets their own salaries, despite the fact none of us work FOR them, we work for our clients who actually have a choice and can negotiate and agree fees with us, those quoted are our standard MAXIMUM terms, not necessarily what we might agree as I suspect many of us who use percentages as a model to calculate a fee then apply a “decency limit”. I did exactly that for a client today, the fee ended up 4/5th of our tariff fee, unprompted as I felt it was more than I needed for the anticipated work (they are not PITAs, they are a pleasure to have as clients). Client was more than happy and would have paid the tariff fee without any problem and wouldn’t have asked for a discount, it was just the right thing to do.

  8. Many commentators confuse the sale of products (which can be price sensitive) with the provision of a service (which is less so – how many women use a particular hairdresser because they know exactly how to cut their hair and do not look around for the cheapest salon).

    But as someone said it is a simple case of economics where RDR (yes the FSA were warned) reduced the supply of advisers just when demand was increasing so it is a surprise that fees didn’t actually increase.

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