Nick Bamford: The race to the bottom on advice costs

Nick Bamford

I am not convinced the subject of price is ever going to go away. The Financial Times ran a piece last month with the headline: How much do you really pay your money manager? Research apparently identified that an investor would pay, on average, some 2.56 per cent per year of the value of their investments for financial planning and the costs of holding financial products. More positively, that amount is lower than the 2.86 per cent cost pre-RDR. That said, I find both those figures rather on the high side.

I was particularly interested in the table contained in the article that looked at the initial and ongoing cost of an investment portfolio. Firms’ initial and ongoing charges were quoted in respect of a portfolio of £500,000, with the emphasis on a discretionary managed portfolio. Initial charges, all expressed as a percentage, ranged from 1 per cent to 5 per cent of the initial investment. Ongoing charges ranged from 1.115 per cent to 2.4 per cent plus “extras”, such as withdrawal fees and trading costs.

What seemed to be missing, though, was any description of what the service offering was. Price is important but how on earth can an investor establish what good value might look like?

Paying an adviser 0.5 per cent of the value of a portfolio could work out more expensive than paying 1 per cent if the latter provides a super all round service and the former does very little.

A client recently reminded me of the John Ruskin quote about pricing: “It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money – that’s all. When you pay too little, you sometimes lose everything because the thing you bought was incapable of doing the thing it was bought to do.” In the race for cheap, have we forgotten about quality and value?

A fellow adviser asked me the other day how I felt about a charge of £22,000 for a defined benefit to defined contribution transfer of £650,000. My answer was in the form of a question: how should I feel about it? Someone else’s pricing policy really is not any of my business. I do not know what they do to justify that level of charge, I do not know what their costs are and I do not know about the level of service they provide. All I can say is that 3.38 per cent of the transfer value seems a little rich to me. Obviously, I know there is extra regulatory risk to consider in such advice areas but all the same…

For me it is about the relationship between price and value. Perhaps the client paying the £22,000 is getting really great value. That should be what matters. The real challenge remains how we describe what we do for our clients. How we demonstrate to them what it is they are getting out of the financial planning and investment management process. It is easy to compare price; it is much harder to compare value.

Nick Bamford is executive director at Informed Choice