Adviser charging for financial advice and pensions is under the spotlight. But a reduction in charges is not always the right solution – I have long argued that transparency is key.
It is right that I should know to the penny what the charges are so I can decide if I want to pay for the service or compare providers. It is also important that charges are easily comparable and not like utilities companies, whose tariff structure makes comparison impossible for all but the rocket scientist.
But lower fees in themselves do not mean a better service – sometimes you get what you pay for.
In this case, the lowering of charges is leading to the withdrawal of the provision of financial advice to ordinary people. Only the rich have nothing to worry about.
Why is there this fixation with lowering charges on financial advice transactions, but not in other areas?
Think mobile phones. Why is it not okay to use some of the monthly payment to cover the cost of advice in a financial advice transaction, while it is apparently okay to charge £40 a month for a contract including a ‘free’ phone? The free phone probably costs £20 a month, half of the total, with the rest covering calls, data and costs/profit for the network provider. Does anyone actually believe the phone is free?
It would be interesting if phone companies had not only to disclose what their charges are, but also to limit their profits to the levels expected of financial advisers. One wonders how many consumers would make a different choice if they had transparency over the costs involved.
So please can we move the debate on from lowering charges to transparency, comparability and value for money? Why should the consumer not be able to choose to pay more for a better service?
The market would then regulate the amount providers charge, with those charging more having to justify this to customers.
Axa is set to close its bancassurance arm, which provided advice through the Clydesdale and Yorkshire Banks. It is the latest in a line of high-profile companies to exit mass-market advice.
Axa has said the charges it can impose for such advice no longer make it profitable, and that this arm of its business had to make a standalone profit if it was to survive.
Traditional face-to-face advice via bank branches is likely to become a thing of the past as banks concentrate on high-net-worth individuals.
Axa says it needs to charge an adviser fee of 6 per cent to make a profit, and with advice charges at 3 per cent, has left the market.
It just goes to show that, even with the best intentions, you can squeeze charges too hard.
Would it not have been better to allow Axa to charge 6 per cent and for the ordinary customers of Clydesdale and Yorkshire to have continued to have access to this service and make up their own minds if it was reasonable? If Axa was overcharging, customers could go elsewhere – if it was not, 450 job losses could have been avoided.
The introduction of the RDR is leading to advice being withdrawn for ordinary members of the public, as providers cannot make any money providing this service and are not willing to provide it as a loss-leader.
Moreover, if banks, with their size of clientele, cannot make a profit in this area, smaller organisations have little hope of doing so.
The FCA is apparently monitoring the situation and will decide whether changes are needed ahead of its 2014 review.
For Clydesdale and Yorkshire Bank customers, this will be too late.
Fraser Smart is managing director, Europe, at Buck Consultants