The key theme running through the FCA’s recent business plan is value for money. As a term, value for money is highly subjective but it has important implications for advisers.
Since the RDR, we have seen strides being made by firms on pricing. Recognising that not all advice given to a client results in an investment being made has led the more progressive firms to introduce an hourly rate/fixed fee structure, or a mix of hourly rates and basis point charging.
But while efforts are being made by some advisers to deliver services for fees that accurately represent the work that has been undertaken, there are still too many examples of pricing structures that support cross-subsidisation, conflicts of interest and contingent charging.
For example, the basis points model is contingent on the client investing or staying invested. It is a legacy of a product sales driven culture that ties advisers to behaviours that may result in the client not receiving the best advice or value for money.
Charges in this model remain linked to portfolio performance, keeping it central to client conversations at a time when they may have other, more important financial goals that exclude stockmarket investing.
The basis points model also makes it difficult for clients to compare advisers on a like for like basis. Even where charges may appear to be the same, the quality and scope of service varies greatly.
There are still too many examples of pricing structures that support cross-subsidisation, conflicts of interest and contingent charging.
The transparency issue has been compounded by providers creating difficult to understand pricing structures designed to shield profit margins at a product and platform level. Intermediaries and end customers are then unable to apply pricing pressure due to opacity and complexity.
Given the recent clear message from the FCA stating its concerns that too many advisers are failing to deliver value for money, and that overly complex pricing structures are one of the factors behind a lack of competition, regulatory change is possible.
The FCA has always said it is not a pricing regulator and so it is highly unlikely it will impose limits on fees. What is conceivable, however, is that it could change how pricing is presented.
Pounds and pence
One option would be to show fees in pounds and pence only, eliminating basis points charging for advice. If this was to happen, the biggest issues facing advisers would be changes to their fee estimating or invoicing processes, which would have to include timesheet recording.
Some platforms and back office providers may be required to amend their functionality. The fee could still be facilitated by the platform or made directly from the client’s bank account.
Initially the change would be difficult but advisers would adapt over time. Clients too would accept it, as it would make it easier for them to understand what they were being charged for.
Some advisers claim clients are uncomfortable with this model due to concerns about “being on the clock” but they can overcome this by offering pre-agreed fees with a clearly defined level of service. Anything over and above this would be charged on an hourly basis.
No easy task
But while the FCA might seek to create the conditions to introduce greater competition, it may not be easy. Comparing advice services on a like for like basis is difficult, regardless of which fee model is applied. Individual client situations vary and different advisers often propose a different approach to the same case.
Buying advice is not like buying a manufactured product. There are a number of other factors that come into play when selecting an adviser, such as a personal recommendation, how comfortable the prospective client feels with them and the perceived quality of service.
That said, developments in artificial intelligence will, in time, create better value for money and help firms reduce risk in a number of areas such as portfolio construction and portfolio management. Many of the jobs undertaken that are directly correlated to the basis points model will disappear. When this happens, advisers will need to focus on the more complex aspects of financial planning.
With so much outsourcing already taking place, the basis points fee model becomes more difficult to justify anyway. Some will claim such a model is required to cover the risk of managing bigger, more complex portfolios but this can be addressed under the hourly rate model.
The adviser just needs to explain that more time and oversight is required to ensure the portfolio remains in line with their stated objectives and, for this reason, additional paid-for time is needed.
Advisers must recognise the benefits of adopting a more progressive pricing approach based on hourly rates and pre-agreed fixed fees to satisfy the regulator while demonstrating greater transparency to clients. Over time, it will help advisers show how they are delivering value for money and remove much of the unconscious bias linked to the increasingly outdated basis point model.
Innes Miller is director at Scydonia