Advisers are striving to demonstrate they deliver value for money amid the glare of negative publicity on charges and greater scrutiny by the FCA.
Firms are trying to meet the challenges of building a sustainable business for the future, calculating how advice charges should be structured, justifying their fees and ensuring the services being charged for are being delivered.
Advisers are beginning to question whether the status quo of pre-RDR charging structures is the most appropriate one, and what a “good” charging model looks like.
In the first of a series of articles on advice charges and pay, Money Marketing examines how some advisers make the sums add up on charges and prove their worth to clients.
The good, the bad and the ugly
There have been a number of stories recently calling major advice firms’ value for money into question. Earlier this month, Money Marketing reported how one firm within Standard Life-owned 1825 is charging 4 per cent initial fees for restricted advice. St James’s Place also continues to come in for criticism, including over its exit charge of up to 6 per cent.
According to FCA data, percentage of investment-based charging is still the most common among advisers, with 47 per cent charging on that basis. Twenty-two per cent operate fixed fees, 20 per cent use hourly charges, and the remaining 10 per cent use a combined model.
Nineteen per cent of initial, one-off or ad-hoc charges are paid directly to the adviser, with 81 per cent facilitated through providers or platforms. Twenty-six per cent of ongoing charges are paid directly.
Threesixty compliance director Russell Facer says ad-hoc or project fees have become more common since pension freedoms as advisers charge separately for work such as defined benefit transfers. But he says: “There’s not a lot of new exciting charging structures. It’s a lot like pre-RDR, just with a different name.”
Facer says advisers may find it difficult if the FCA chooses to pursue a value-for-money review on advice changes. He says: “It’s easier to say what good doesn’t look like than what it does. Fundamentally, it goes back to if there’s a cost that’s a surprise, can you as the adviser justify that? Does the client think that’s alright?”
He adds while high initial charges may be unpalatable to some, if a client does not see their needs changing much in the long run it would benefit them to pay a premium to get things right upfront.
“Fundamentally, it goes back to if there is a cost that’s a surprise, can you as the adviser justify that? Does the client think that is alright?”
The issue goes beyond value for money, but how to illustrate this to clients and the regulator.
London-based Plutus Wealth varies charges based on the qualification level of the adviser. Plutus bills £300 an hour for chartered financial planner time, down to £225 for other advisers.
Plutus Wealth partner Georgina Partridge says: “When we are pricing, we look at time, experience, expertise and qualifications. Chartered planner time adds value with the added expertise and experience. By having that in the client agreement it’s a chance to explain what chartered means.”
Hourly fees are also a good chance to explain everything that goes on behind the scenes to justify the bill, such as hours spent on research, and Plutus can then send a quote for advance work after the initial meeting.
Partridge says: “Clients will sit down with an adviser, and they say that’s the fee. They don’t then say they don’t want to see a chartered planner to save money.
“DB work often needs to be done by someone with more experience. Again, it’s explaining to the client this is a more specialist area of advice. Consumers who have not been exposed to financial services might not understand that, so we talk that through about the value we are adding.”
Plutus recently reduced its initial charges from 3 per cent to 2.5, down from a previous high of 4 per cent. Ongoing rates are either 0.9 per cent for an actively managed service, with investment committees producing quarterly reports and annual reviews, or 0.5 per cent for a less active ongoing service.
Partridge says even though firms may work out their fees based on a thorough value-for-money or cost assessment, charges are still partly based on current industry norms, such as 3 per cent initial and 0.5 per cent ongoing.
She says: “We are certainly cognisant of what others are charging and what probably dictated our decision to have a conversation to reduce upfront costs was because we were aware that is the way the industry is going and we have to adapt.
“There does come a point where all advisers can’t keep reducing charges and it becomes untenable.”
Picking a price point
First Wealth partner Claire Phillips says her firm operates a tiered system for initial fees depending on portfolio size, while ongoing fees are the same for all clients.
For a new client, the firm will levy an additional charge of up to £1,500 to cover data gathering and a review of their existing investments and pensions, a cashflow and an initial planning report. Clients can then choose to continue with the service, take these to another adviser or go it alone. Phillips says this helps ensure the firm only gets clients who buy into their long-term financial planning philosophy and will get value from it.
She says: “They don’t generally have an issue with that because people like the idea of financial planning. If they have decided to get to that point they are on board and see the benefit of financial planning and are prepared to pay for it.
“If they’ve got an issue with the fees they’ve probably not into financial planning and naturally fall away. It’s not a deliberate barrier, but it’s definitely there in part to test their commitment to the process. We want clients to commit to the long term. We don’t have an incentive to come on board so they know we’re not sales-based.”
As part of those initial meetings, First Wealth will also provide indicative costs on factors such as regulation and compliance. Phillips says: “We have to make money. We explain we have got overheads, compliance and the liability that goes with that which lasts forever when you are going to the Financial Ombudsman Service.”
Phillips says her firm will undergo another number-crunching exercise later this year to see how all their business costs stack up compared with their fees.
She says: “We haven’t just put a finger in the air. Some clients are going to cost more, some are going to cost less. That’s why we have come up with a minimum for clients coming on board for us to recuperate the cost of taking them on.
“£1,500 may not have fully covered the cost but at the moment that’s what we are going on to get people used to the idea of doing it and encourage people to come and use us.
“We want to factor in enough for costs with enough profit on top of that…I guess everyone has their own view on what enough profit is.”
The flipside of the value for money coin is not just cutting charges to the client, but also the costs the business incurs in managing their portfolios such as discretionary fund management charges.
Phillips says: “We are always looking if we can reduce charges in terms of fund management. It benefits us; the client is paying less charges and by doing a percentage on charges we are getting more.”
Strategic Solutions partner Kevin Forbes says his firm also levies higher charges to see chartered financial planners or specialists at the firm: £250 an hour compared with £150 for others. This is partly down to the need for pension transfer qualifications; the firm has five pension transfer specialists.
Strategic Solutions will conduct all work up until transfer, including a cash equivalent transfer value and transfer value analysis, for free.
Forbes says: “We do a lot of free stuff, probably much further than we should do, but I don’t always feel comfortable making a client pay for a service they don’t get any value from.”
The firm also offers regular pro-bono sessions in and around its Bournemouth base. Forbes says: “It’s important for everyone to get access to quality, independent financial advice. We don’t turn anyone away.
“We are big enough, we form part of the community, and there’s a certain element of what we do should be helping people just starting out and getting them help. The profession has been chasing big pots of money like the big direct sales pitches of the 80s and 90s, and that’s not healthy for society or the community.”
Strategic Solutions also includes decency limits within its tiered fee structure above which it cannot charge.
For smaller, more complicated portfolios, the maximum is 3 per cent, scaling down starting from portfolios over £250,000 to “reflect the economies of scale” of servicing larger pots.
Forbes says this does not happen in direct proportion to portfolio size though, because the larger portfolios can expose the firm to more risk and charges have to account for this.
He says: “That’s the danger with fixed fees. You might make £10,000 on a case of £500,000 or £5m, but with £5m such a small error will be hanging the company out to dry, so the reduction in cost is not exactly a straight line. It’s not 10 times the work, but it’s much more risk.”
What the market will bear
Forbes agrees advisers tend to judge fees based on those around them. He says a lack of competition, particularly since the post-RDR decline in adviser numbers, has led to some firms charging more than necessary.
He singles out SJP as a case in point.
He says: “SJP has got away with it because people don’t have a choice. It’s not an issue of what do we charge, it’s an issue of there aren’t enough advisers so they pay the going rate
“It’s one of the unintended consequences of RDR: there’s not enough advisers out there. That pushes the cost of advice up and people are paying it.”
Forbes adds: “We try to be fair but not every adviser out there will be. Until we get another 10,000 advisers, then you are going to get high fees because there’s no competition.
“It could be the tip of the iceberg. If you lose another 5,000 adviser fees will go up even more.”
But Forbes says compared with other sectors, advice charges will still look favourable. He says: “If you based our charges on what a lawyer or accountant does we should get paid multiple times more. Others are purely transactional – we look after the clients.”
The FCA is not a price regulator and does not have any formal powers to regulate fee levels or charging structures. Firms are free to charge on an ad-valorem, time-cost, activity or fixed fee basis. The key is to ensure fees are clearly disclosed to the client in a way that allows comparison of costs across different firms.
Whatever the charging structure, firms should consider the type of behaviour they may drive. For example, pure ad-valorem fees on a contingent basis are more likely to focus on asset-gathering than on a pure time-cost basis. I am not saying pure time-cost is better because ad-valorem may more realistically reflect the risks of doing business for firms. However, firms should be able to demonstrate they have considered this.
The FCA uses the phrase “value for money”. For advisers, this means looking at the actual level of the fees combined with other costs across the value chain, such as fund or platform costs. If these exceed the equity risk premium, it raises the question as to whether this is any benefit from the service. To put it another way, would you pay your accountant £1,000 to save you £100 in tax?
The setting of fee levels and charging structures is an inexact science. They are determined by factors such as a firm’s cost-base and perception of risk and reward. Additionally, clients’ perceived value of the service may also justify premium pricing. When setting fee levels and charging structures, good practice would involve objective analysis.
One good practice I saw was a firm setting its fee levels based upon analysis of both the operational and time-costs of providing its service and applying a mark-up based upon its target for profitability. This made it very difficult to challenge the fairness of its fees.
Esrar Moitra is consulting director at Optima Regulatory Strategies