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A question of decency: How much is too much to pay for advice?

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Advisers are being challenged over the appropriateness of ongoing advice fees as it emerges clients of major advice brands are being charged upwards of £60,000 a year for advice.

Money Marketing has sought to quantify exactly what is being charged and approached 20 adv-ice firms for details of what they charge for ongoing advice and what their top- paying client is charged in pounds and pence. Firms were also asked about their stance on decency limits, where a threshold is set on the maximum amount deemed reasonable to charge for advice.

Of the 20 firms approached, including nationals and networks and spanning independent and restricted business models, only seven provided substantive responses on their ongoing advice charges.

Anecdotally, Money Marketing has heard of cases where some clients are being charged £60,000 a year for ongoing advice, and in one case £80,000.

So how do firms monitor what is being levied as an ongoing advice charge? Are all clients fully aware of what they are paying for ongoing service in monetary terms, and would they be able to challenge this if the promised service levels are not delivered? And what is the regulator’s role in policing whether clients are paying too much for advice?

Flags and breaches

Some advice firms choose to operate decency limits and monitor whether these are breached as part of their compliance checks.

Best Practice, for example, quotes an average of 0.74 per cent a year for ongoing advice including discretionary services. It says 93 per cent of clients pay the quoted ongoing advice fee.

The network has set its decency limit at 1.25 per cent for ongoing advice, and cases are flagged on its system where the charge is above 1 per cent. Cases are also highlighted where a fee is more than £25,000.

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Chief executive Ian Cooke says: “There’s a limit to what we think an IFA should charge, and the FCA would expect us to police that. 1.25 per cent is probably too high anyway, but you have to set the bar somewhere.”

The company asks advisers to justify where charges are over 1.25 per cent, and valid reasons may include if other services are bundled into the advice charge.

Cooke says he has come across firms charging inappropriate fees for advice.

He says: “I had a lottery winner who won a multi-million pound jackpot, and his bank was charging 1 per cent for ongoing advice. They also charged him £120,000 to set up a couple of bonds. It is outrageous.”

He points out wealthier clients such as professional sportspeople would tend to opt for a fixed fee.

Standard Life-owned 1825 quotes 0.79 per cent for its annual management service and two thirds of clients are paying this. Its threshold for the service is set at £14,750, and again advisers are asked to justify charges beyond this.

1825 chief executive Steve Murray says the company is keen to ensure advisers are delivering value for money and striking the balance between the service being provided and the level of fees.

He says there may be circumstances where an ongoing advice fee of £80,000 is acceptable.

He says: “There may be scenarios for any advice business where if there was a huge amount of work involved, with lots of tax and trust planning across business and personal lines, an advice business could deem it was appropriate to pay that amount of money. We have to be careful with headline numbers, but until you understand what the activity is it is difficult to see whether that’s right or not. If an adviser is working full-time on that client for six months of the year, that could be incredibly good value for money.”

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The cost of advice

Many commentators are quick to point out that the focus needs to be less on the headline figures and more on what work is being done in return. However, they admit that upwards of £60,000 for ongoing advice sounds excessive.

Cooke says while running an advice firm is not cheap, given the levels of vexatious complaints and the cost of regulatory bills, there is still a question of what it is reasonable to charge.

He says: “The FCA’s rules say you have to offer the consumer good value. That’s easily relatable to adviser charging because it’s not reasonable to charge a fee that is much more than what you are offering in value. That’s common sense.”

The Ideas Lab director Robert Reid says: “Sometimes with quoted charges it’s more aspirational than reality.

“One of the things that’s driving the decency limits issue is too many advisers are dealing with people who do not have enough money, and the average account size is too small. Sometimes ongoing advice charges will look bad in small cases where it’s percentage-based, but they are actually quite reasonable. Then when you look at large cases, the percentages look absolutely outrageous. The difficulty is deciding what’s ‘decent’ and what is not. What it comes down to is time cost versus what is charged. I would question how anyone could justify £80,000 worth of work.”

Reid says the reality of regulated advice is it carries a fixed cost, and estimates that to open a new client file can cost between £1,000 and £1,500. He also acknowledges advice will sometimes cost a lot because of the work involved.

He says: “There is a difficulty in taking on some advice work, such as occupational transfers, and that creates a greater reluctance to cut charges. Advice is taking longer and in some cases charges are insulating advice firms. If there was a clear way for clients to work out exactly what they were paying, some clients would have a real problem. It would cause ructions.”

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The role of the FCA

The question of what is appropriate to charge for advice may be one for the FCA, but the regulator has previously stated it does not want to intervene in policing advice costs.

Threesixty managing director Phil Young says: “The FCA has a conflicted position on this. It doesn’t want to be a price regulator, but it does want markets to work for consumers. That must include ‘self-defeating’ pricing whereby the costs of advice and investment outstrip the benefits, regardless of how much ‘service’ is provided. How the regulator makes this so obvious to consumers they can decide for themselves is a considerable challenge.”

Reid argues the decency limits problem is symptomatic of a wider issue with charges disclosure post-RDR.

He says: “If you go to some advisers’ websites and try to find their charging structures, they can rarely be found, or you have to spend a long time hunting around for it.

“Disclosure has failed. I wish people would stop saying we’ve moved on from the RDR, because we really haven’t. I can’t see any evidence of that. What happens if clients want to know what they get for their money? I’m not sure the answer of ‘peace of mind’ is going to cut it.”

Personal Finance Society chief executive Keith Richards does not think the FCA should prescribe decency limits across the advice sector. But he says it should have a view on what are appropriate charges to pay for the benefit of receiving advice.

He says: “The FCA has made it clear on a number of occasions that it will continue to monitor fee practices and in particular contingent fees, but does not want to set limits. The right approach is for advisers to individually agree their respective fees with their clients based on their service proposition and provide full and meaningful disclosure of all charges.

“In isolated cases where advisers seem to be flouting the principle or spirit of fair charging, it is incumbent on the profession and the firms facilitating adviser fees to report such evidence-based cases to the regulator for further investigation.”

Expert view: Malcolm Kerr

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I have heard of clients being charged between £25,000 and £50,000 for ongoing advice, and even that has raised some eyebrows. A lot depends on exactly what service is being provided. The really important thing is the client fully understands what the fees are and is comfortable with the level of service being provided. That service should be very clearly documented.

The regulator would be concerned from a treating customers fairly point of view if the client was paying an unreasonable amount of money in return for a relatively straightforward service.

On the face of it, it does sound like an enormous amount of money, but it is not inconceivable that an adviser is allocating one full-time person to look after a complex set of arrangements where the adviser is running a concierge-type service alongside running the money.

Rather than the high-net-worths, I actually worry about the implications of unreasonable charges at lower end of the market. If someone has £100,000 and is being charged 50 basis points, and they are being promised certain levels of service and a certain number of client meetings, how is that being delivered? Obviously what’s happening is the client with less money is being subsidised by the client with more money. That is the reality, but clearly this is not necessarily in the interests of the wealthier clients.

The FCA is not a price regulator but it is not unreasonable for it to expect advisers to deliver a satisfactory outcome to clients. If the advice fee is using up more of the fund at a faster rate than the fund is growing, it becomes less about “decency limits” per se but what is reasonable.

Malcolm Kerr is senior adviser at EY

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. I’ve just read the article about the RBS Lawyers and their fees. I didn’t notice any mention of a “decency fee”. Why are we always beating ourselves up over fees. As long as they are disclosed and discussed with the client then it is up to them. The Adviser needs to be able to justify it to their client, if not the client can take their business elsewhere. I thought that was the whole point about disclosure. I don’t see Fund Managers & Insurance Companies talking about capping their fees and imposing a “decency fee”. Maybe the FCA could think about a “decency fee”. What do you think the chances of that happening are?

  2. The problem with having a decency limit is that “our costs” are not subject to the same decency limit (FCA, FOS, FCSC, MAS, PII) take note. Costs are often based on “risk” and turnover and only some of these costs are contained by competition in the market (PII) the rest are set to increase without check. So my hourly rates are set at a level to cover the costs of trade (FCA, PII, complaince etc), plus a bit to cover the “surprises” (FCA, PII etc) and then my fixed costs (wages etc) plus a small profit. The only “indecent” bit in my view is the time it then takes to complete even the most menial task, which ultimately is billed to the client and that, in my view, is down to over-regulation and inefficiency of providers.

  3. Trevor Harrington 29th September 2016 at 9:59 am

    I worried about this when I created my current business, back in 2010.

    The solution I found was to send the client an annual statement showing ALL the revenue which my company has received from their accounts in the preceding year. It is also states in my terms & Conditions of Business that I will do this (alongside two automatic printed annual reports).

    I am quite sure that there will be a lot of Advisers out there, if not most, who would baulk at doing as I do, simply because their client is currently blissfully unaware of the full payment that they are actually making, and also that Adviser would not be able to justify their earnings in relation to the limited services being provided to the client.

    However, it would be a simple thing for the Regulator to make it compulsory to declare all revenue in an annual statement to the cleint, and in my opinion they will indeed do so in due course. In other words, if your clients are currently unaware of the total cost that they are paying for your services, you should adjust your client service proposition, make plans to do so as soon as possible.

    • I thought it was compulsory for an adviser to confirm in £ and p what an adviser receives over the year, although recently I have seen adviser review documents left with uinhappy clients and one stated their charges as a % and the other didnt state it at all.
      Saying that , ive come across advisers who have stated their on-going services are compulsory.

  4. ‘Let the market decide’ is often the response to questions about adviser charging. However, as long as financial advice remains a cottage industry, and its pricing a mystery until the client is face to face with an adviser, there is no opportunity for market forces to hold sway. The cost of advice has risen as a consequence of customers not having an open market to make remote comparisons.

    Angst about decency limits reflects a general lack of confidence that the ‘service’ is worth paying for, particularly where financial planning advice is priced on an ad valorem basis relative to invested assets rather than the advice/monitoring ostensibly provided.

    As Warren Buffet opined, “Price is what you pay, value is what you get”. The question is, to what extent did my net financial position improve as a result of the service, and how much of that increased benefit warrants directing to the adviser – irrespective of any investments they may supervise? If the provision of advice produces less tangible benefits like ‘peace of mind’, how do I price that?

    Most importantly, if regulation proscribed the facilitation of fees, and the customer had to write a cheque, do customer and adviser still feel comfortable with the price?

  5. fees are a commercial issue between advisor and client, particularly since RDR- so they have to be value for money or the customer will move elsewhere. What has this to do with a Regulator?

  6. It will never be a completely fair and transparent system. If you have an old school salesperson, looking to buy their next toy or expensive holiday, they will push the price as high as it will go, and then defend it on the grounds that everyone else is doing it.

    At the other end of the scale professional advisers will charge more accurately for the time, expertise and risk involved in providing the advice, sadly I believe many consumers still do not know which is which and assume that we all charge similar amounts.

  7. Agee Trevor – system whereby firms invoice the client each year for their ongoing fees and then mark it as paid. We provide an annual statement of hours worked and how much income we have received and I do not see how this system cannot be extended.
    What I will say is that the cost of bringing a client onboard is so high that if we charged what it actually cost (much of it regulatory) we will drive clients away. Existing clients are perhaps subsidising the cost of bringing then on board in the first place…..

    • Sam seems like you have a fair system to me Yes the cost is high to bring on new clients that is the commercial we all have to consider But if You take a long-term view is my personal opinion that all clients prosper. After all, there is always a cross subsidy in obtaining new business.

  8. That lottery winner being charged by his bank 1% of several million quid for “ongoing advice” (??) and who was ripped off to the tune of £120,000 just for arranging a couple of investment bonds (I’ll bet they weren’t even offshore either) brings to mind the old saying about a fool and his money being easily parted. How can the bank have got away with such blatant over-charging post 2012? Even before 2013, we had hard disclosure, on which basis I won a (not very bright) client away from HSBC and did twice as good a job for half the money the bank had been proposing to charge.

    Perhaps another 500 pages of FCA rules will sort things out (not).

  9. I am a one man operation, I always say my advice is appropriate to the amount invested and if the case is complex eg IHT, trusts etc. I know a colleague who always uses a model of zero initial plus 1% ongoing. My average is 1.64% plus 0.50% ongoing. I cannot justify charging 3% on a straight forward investment say of £100,000 as it would be disproportionate to the work involved, it would be 1.25%, however I would qualify that statement to a higher amount if it were more complexed. It would be alarming if any adviser charges a 3% rate on say £1,000,000 that is £30,000 initial which would be wholly disproportionate.

  10. some.really good points particularly by Lindsay Lockett. I think value for money is crucial to ones self esteem. if I feel that I would be charging significantly more in fees than the value I am adding then I tell the client that our fees would be too high for the service they are seeking. whilst we have to make a profit we can apply ethics to how we do it. in that way the Regulator can butt out.

    • This extract from the FCA handbook might be useful

      Calculation of the cost of adviser services to a client
      COBS 6.1A.16 G 31/12/2012

      In order to meet its responsibilities under the client’s best interests rule and Principle 6 (Customers’ interests), a firm should consider whether the personal recommendation or any other related service is likely to be of value to the retail client when the total charges the retail client is likely to be required to pay are taken into account.

  11. Yet again this topic is looking in the wrong direction. It isn’t cost it’s value. Paying 0.25% for an outsourced model portfolio is extortionate.

    Making or saving a client (say) £20k and charging (say) £2k is pretty good value.

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