More fund manager bosses are starting to do sums that aggregate adviser fees with their own. Robin Stoakley of Schroders is the latest to do so, claiming a total of 240 bps is too much and making the adviser fee of 1 per cent seem excessive.
It is only natural for fund management groups whose margins are under pressure that is not yet nearly severe enough, to try to deflect criticism. But Stoakley and co are on the wrong track completely.
First, let’s remember that platforms in their current form exist only because of the greed and laziness of fund groups. Had they put in place a universal Oeic and unit trust fund settlement system such as other European countries have had for years, then setting up a cheap platform would be easy. They did not, and chose to outsource their administration and settlement to platforms whose cost was paid by rebates from the managers, but is now to be paid direct by clients. Clients only need to pay the standard 30-40bps to platforms because fund managers failed to invest and fund settlement is messy and expensive.
Incidentally, once the UK has a proper fund settlement system the cost of entry to the platform business will plunge, which is one reason why I think their fees will fall faster than their bosses care to contemplate.
Second, fund groups continue to think like distributors. They see the cost of advice as the cost of distributing their products. This is the wrong model!
The advice fee is for advice, and if the adviser does not give any advice, he will not collect the fee for long. That advice fee does not just cover investments. Most professional advisers with a service proposition will review the client’s plans, circumstances, risk profile, tax position and wrapper selection, and the recommendations they make for change in these areas are likely to be more important to the client than changes to funds within an asset allocation framework.
So far, most advisers with a service proposition have chosen to charge as a percentage of client assets under advice. Probably most of them taper their annual fee once assets reach a certain size. They know there is a significant element of cross-subsidy involved in having a 1 per cent fee for people with £200,000 and £500,000. Probably most of them also know that on average a client with £500,000 requires more service – especially in terms of the most expensive factor, adviser time – than the client with £200,000.
Banding is the obvious solution, though it’s also important to recognise that there will always be a minority of clients who don’t fit the model and require more or less advice than is assumed in a percentage fee scale.
Over time, it iss possible that advisers will move towards asset bandings for fees for ongoing advice. But I see no reason why they would want to abandon a percentage basis. Clients like the fact that this aligns the adviser’s interest with theirs.
Advisers who do nothing for their ongoing fee but send out automated valuations with a standard covering letter will, over time, lose clients to advisers who do the job properly.
Like many of the changes following RDR, this is a slow burn. Good advisers can afford to be patient.
Chris Gilchrist is director of Fiveways Financial Planning, the author of the Taxbriefs adviser guide The Process of Financial Planning and edits The IRS Report