From 3 January, advisers will be required to provide clients with an estimate of their annual fees in advance and later a statement of the actual charges at the end of a 12-month period.
This is just part of the statement of the aggregated costs of investment advisers will have to provide under Mifid II, so it is a complicated piece of work.
Many advisers have not yet got to grips with the organisational implications of the new regime. But it is the consequences for fee charging that I want to explore here. For the first time, advisers will be drawing clients’ attention to their fees, in pounds and pence, at least twice a year.
Chances are most clients will react well to this additional form of disclosure. But some probably will not. Or at least they will start thinking more critically about what they are getting in return for fees that might easily exceed a third of the income from their investments. Many clients will expect more added value but without paying any more. Indeed, they may well want to pay less.
Part of the answer for advisers is to increase their productivity. But increasing productivity is a major challenge.
With this in mind, it makes sense to invest in higher productivity now, while things are going well and funds should be available.
Productivity is essential for adviser firms. This is for many reasons, not just because the Mifid II disclosure requirements will make clients more sensitive about charges.
Advisers’ costs are increasing and their incomes may not grow in line with rising expenses in the future. While the advice sector has been riding a wave of success, the increased costs of employing qualified staff have rocketed.
So far, the advice sector has been boosted by a series of fortunate events. Rising markets have underpinned rising charges and the pension freedoms have also been welcome. The latter looks to be the gift that will keep on giving for some time to come.
That said, much of the at-retirement market consists of very small pots and there is the possibility the mass solutions being devised for this sector may well start to creep up into more prosperous portfolios and compete with them.
In fact, the bulk of advisers’ clients’ pension pots are in the region of £100,000 to £120,000. The concern is that the complexity of planning for this market on an ongoing annual basis may not always justify the levels of recurring charges advisers are counting on.
Defined benefit transfers have been a windfall for the advice profession but, by its nature, this development is bound to tail off to some extent. In any case, the costs that should be involved in providing both the initial and ongoing advice safely may be more than some advisers expect.
So, how should advisers be planning to increase their productivity?
If productivity is crudely defined as sales decided by the numbers employed, then it is important to maximise the levels of income per person.
Advisers can do this by focusing on higher value clients or they can aim to service a larger number of lower value clients with the same number or fewer members of staff and with lower costs generally. Indeed, servicing all clients more efficiently and effectively should be a key goal.
Platforum’s research into the advice market suggests the most successful firms are constantly reinvesting in improving processes and the organisation that surrounds them. This involves setting up processes that arrange client meetings – sending the appropriate documentation (agendas, factfinds, valuations and so on), recording the meetings and writing up the discussion – as automatically as possible.
Advisers need an investment process that avoids manual rebalancing and other cumbersome adjustments to portfolios as much as feasible. Where appropriate, they should use modern communications methods (Skype, for example) for clients who would rather not come into the office.
And in the office, it means administrators doing administration and advisers doing advising. You cannot – and should not – charge adviser rates for administration jobs. And however you charge (according to assets under advice, fixed fee, by the hour or a combination) it also means knowing how much time advisers and other team members spend on each client. The good news is that this can increasingly be achieved more or less automatically. That way it is possible to assess which clients are profitable and which are not.
Productivity also means providing more added value. If advisers and their teams are more efficient, helped by the greater efficiency of providers (here’s hoping), this should free up some resource to provide services clients will really appreciate. That would be more financial planning, cash flow planning and, of course, tax planning.
Danby Bloch is chairman of Helm Godfrey and consultant at Platforum