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Advisers, providers and platforms are all under pressure to justify fees

HopkinsHeather

Fees were the hot topic among advisers, providers and platforms at the recent Platforum 2016 conference. The subject cropped up in every session, with each party pointing fingers at another, arguing pricing pressure should be exerted anywhere but on their own part of the supply chain.

There were calls for platforms to charge a flat rate rather than ad valorem, and speakers disagreed about which part adds the most value to the customer. The general consensus was that advisers, being closest to customers, probably have the least to worry about in the short term.

A few weeks ago we wrote a piece in Money Marketing highlighting the optimum price point for one-off financial advice as £800 and 50 basis points for an ongoing service. The findings are encouraging, as it shows the gap between advisers’ actual charges and clients’ expectations is not as wide as many people expected.

platforumgrph

What is more, most advisers tell us that they are now making efforts to reduce the total cost of ownership for investors. Using passive tracker funds has been key to reducing costs here.

Our recent report on passives, ETFs and smart beta revealed that 18 per cent of adviser platform assets sit in passive products, with use of such products rising rapidly since the RDR. But despite this shift, advisers and investors show a continued preference for active funds.

Some would argue that fund managers are not being squeezed enough. Indeed, Nucleus chief executive David Ferguson noted at the conference that shifts in charges have been unevenly distributed in the value chain. Platform prices have fallen but fund management fees remain relatively unchanged.

In another part of the supply chain, discretionary fund managers charge fees for their bespoke and model portfolios. There was much debate at the conference as to whether DFMs add value or whether they are simply another “snout feeding at the trough”, as one attendee colourfully put it.

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Indeed, several questions from the audience challenged their value and asked whether multi-manager or multi-asset funds might not be more tax and cost effective – in theory, if not always in practice.

Of course, cheap does not necessarily mean better. In response to a question about why platform fees do not come down to 10bps, Standard Life head of adviser and wealth manager propositions David Tiller replied that, while it might be possible to get one that just trades funds for that level of fee, it would not include tax wrappers, client reporting and other services.

We agree – at least up to a point. There is a trade-off between low price and the service and support clients and their advisers receive. That said, we expect to see continued pressure across the supply chain. As investors become more aware of what they are paying, advisers and other players will feel more pressure to justify those fees.

Heather Hopkins is director of research at Platforum

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Comments

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

  1. Easily solved just go back to commission with a 3% + 0.5% cap!

  2. Given that the major wrap providers seem to be spending circa £200m every time they upgrade I’d suggest that the minimum we can realistically expect “average” AMCs on wraps in the long term is 0.2% but even then only when there is sufficient “head of steam” on new business. Aggregation of wraps will continue in the meantime to create the necessary AUM figure required to fuel economies of scale and to replace lost “life” business. Until we have some cost control on regulatory and associated fees can’t see much changing however from the current position. Would be good to see wrap providers providing facility to tier adviser fees commensurate with client holdings in same way that platform fees can be tiered – please take note wrap providers and implement! Or will that be another £10m cost?

  3. Human nature is what it is and the push for cheaper products will always be there.

    Most importantly, who has the right to say what is or is not the correct charge. These organisations are there to make a profit, have development cost, running costs and other expenses to cover and should be allowed to get on with it. They are not Public Sector departments, they are Private Sector business and as such should be allowed to charge as they see fit.

    The issue is being able to supply, support and remain in business. All to often those with the most to say about this issue receive their salaries or consultation fees regardless of outcome.

    There is a universal truth that you cannot supply quality cheaply. Increased regulation, consequences and costs are also applying additional pressure. Market forces will eventually push out the over priced, under performing contracts, especially if we remain in a low inflation, low returns environment.

    Spending millions to review this in my opinion is a complete waste of money. Depending where we are in the economic cycle depends on which investment strategy is performing best.

    The consumer should then make their won minds up.

  4. “Using passive tracker funds has been key to reducing costs here.”

    Yet again cost is being confused with value. There have been quite enough articles claiming that trackers are a ‘Marxist Plot’. (DT Business section 26 Aug 2016)

  5. I’ve seen passives as being a way to reduce total cost of holding an asset, only for the ongoing advice charge to be 1% and I have no doubt this proposition is sold on cost of investment whereas in reality the total cost to the investor may well be in the region of an active portfolio it’s just the ‘split’ is in favour of the adviser.

    On the other hand, SJP make a business out of a high total cost of investing proposition (incorporating for want of a better word, commission and, as far as I’m aware, exit penalties). They no doubt sell on ‘value’ and seem to be good at it even though it’s likely clients could invest at a lower cost, not fund the advice within product charges (which over the long term is likely to be detrimental) and have a broader range of funds to invest in.

    Likewise some platforms have fixed costs, some are %age based and therefore what is ‘best’ depends on the client and the AUM.

    The most important thing is choice – if you strike out one option – even if for the majority it’s better there will usually be losers (commission being a good example). Most benefit from significantly lower ongoing charges where there is no commission plus exit penalties are typically a thing of the past, but I still come across situations where commission would have been in the clients best interest – not often I must admit – but sometimes.

    It’s up to consumers to make choices from the range of options and if advice is impartial and independent, why wouldn’t the advice choose what they feel is best for their client?

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