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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



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There are 7 comments at the moment, we would love to hear your opinion too.

  1. I bought 3 garden strimmers in 2 years at a total cost of £220. All broke due to their lack of quality and their ability to do the job as promised. I now own a £120 main name product which I considered too expensive at the time and guess what? I wish I had done so from the start and saved myself £100 and lots of aggro along the way.

    My point? Well there are 3 really. 1) Buy quality every time 2) Don’t buy on price alone 3) Do your own research so that you know what you are looking for and what you expect to get for your money; check the experiences of others too.

    I may be crap at buying strimmers, but I would certainly be more careful with larger sums of money (never too old to learn)….(I’m not as good as Nic at these stories am I?!):-)

  2. I believe that fair price is an individual decision, and consumers have the ability to decide what price they are willing to pay.

    My concern is that once something akin to ” the norm ” is established, it feels like commission all over again, and easier for unscrupulous advisers to hide behind when charging excessive amounts. The case that Nick refers to seems to fall into the commission substitute category, I personally apply a decency limit rather than milk the client for all they are worth, I am still seeing advisers charge for fund switches which should be part of the ongoing service which is already paid for.

  3. Nick hit’s the nail squarely on the head – and it is for this reason all the research which says (for example) clients will only pay £156.34 (or whatever incendiary figure that is being used to justify the death of face to face advice) for advice on their retirement is irrelevant IF the researcher hasn’t explained what is involved, the protection the investor gets and how a qualify IFA aligns with the clients best interest.

    What really sticks in my throat is where non-advisers or tied advisers earn more for selling their own products via a sausage machine approach than what the cost would be if client focused, impartial and independent advice is sought – but that’s another argument.

  4. “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.”

    Answer A would be the same as Nick’s. Answer B is that it’s an obvious “please go away” quote.

  5. That's because.... 23rd September 2016 at 6:58 pm

    Any prospective client that argues over the cost is promptly shown the door.

    I see people who have historically cost themselves hundreds of thousands of pounds by not taking advice – whether those costs be incurred in unnecessary ‘execution-only’ commissions or retail client level fund management fees or unnecessary income or capital gains tax or Lifetime Allowance tax charges or unnecessary capital losses through poor investment self-selection or believing what Paul Lewis prints or…..etc etc.

    Sometimes they have taken financial ‘advice’ from either an accountant or a divorce lawyer, for example, in the niaive belief that “they must know what they’re talking about”. Hmm….

    Only yesterday I had a Chartered and Certified Accountant, who owns his own practice with private and SME type clients, ask me how much he could contribute in to his own pension!

  6. A charge of £22K for advising on and arranging even something as complex as a transfer from a DB pension scheme suggests that the FSA’s attempts to empower clients in the price for advice process have failed. Either that, or the adviser thought he’d try for as big a charge as he thought he might be able to get away with and the client didn’t read the SR properly or didn’t realise he could have challenged it.

  7. I agree you get what you pay for. I pay for private pension advice but I feel I get a good deal

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