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.
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