The FCA is determined that competition will increase as a result of adviser charging.
Early indications suggest its dream will come true if evidence from the current series of Personal Finance Society regional events is accurate. While this is based on anecdotal data and straw polls there seems to be a shift toward clients paying direct for advice, particularly initial work and a move away from “three plus a half”.
In broad terms around 80 per cent of firms are continuing to operate a percentage based charging structure with a high proportion tiering their initial charges. A smaller number are tiering ongoing charges and many have made the move from 0.5 per cent to around 0.75 per cent.
The tiering on initial charges was expected and is the strongest evidence of competition, particularly as clients are more likely to understand what is going on with initial work and perceive it as a package of activity.
It is a matter of time before that same competitive pressure works through to charges for ongoing service. At present there is a minority of firms who argue that an ongoing charge of 1 per cent will be hard to sustain unless the service is very hands-on and bespoke.
The move toward fee based project work at the initial planning stage is interesting and seems to be occurring more quickly than expected. Indeed, firms who have been running adviser charging or a close equivalent for some time show a trend from percentage charges to fees for initial work, although continuing with percentages for ongoing. In a high number of cases this is backed up with minimum charges to make sure work is paid for.
“Three plus a half” seems to be have been an initial stepping stone into adviser charging for some firms. This is not an unreasonable way to enter a new set of rules and trading conditions and there will inevitably be some who have not moved on as indicated in the thematic review from FCA published in July.
However, many have responded to market pressure and modified their approach and it would be expected that a large number of firms will alter their tariff within the first year of adviser charging as the market settles. But the word “settle” is used with care and does not imply a return to the high degree of stability that existed under the old commission based system.
There is no doubt the market dynamics have changed and that the price of advice will be a much more significant part of the competitive toolkit than commission rebating or enhancing the monies invested ever was in the previous regime.
David Shelton is the author of “The Business of Advice” book and website www.businessofadvice.co.uk