The FCA continues to focus on the value consumers are receiving from the long-term savings and investment market. I do not have a problem with that. But how will it measure value?
Some clues can be found in its general insurance “market values pilot” published earlier this year.
The value measures were 100 per cent financial metrics:
- Claims frequencies: How often consumers are claiming on their insurance policies – calculated as the number of claims registered, divided by the average number of policies in force
- Claims acceptance rates: How likely claims are to be accepted – calculated as the number of claims registered, less the number of claims rejected, divided by the number of claims that have been registered
- Average claims payout: Could include internal costs and relevant external costs, as well as payouts to policy beneficiaries. These could include claim investigation costs or payments to third parties to repair a customer’s damaged wall, for example.
It is understandable why this approach was taken but does it tell the whole story? For instance, how do customers feel about the claims experience? Would they recommend the company to friends? What kind of value is placed on the brand of the insurer? How important was price to their buying experience? And so on. In the end, value is determined by the consumer.
The difference between value and price
I was reminded about this the other day when I picked the last of my asparagus crop. It has been a bumper year. Eating for free is rewarding, even though asparagus costs only £1.50 a bunch in season if you buy it from the market. Excellent value.
In restaurants, the price of asparagus as a starter differs widely. Balthazar in Covent Garden offers “Steamed English asparagus with butter” at £10 (plus 12.5 per cent service) and it has plenty of repeat customers who, one assumes, find the overall experience good value.
The River Café in Hammersmith is booked solid most of the time. It offers “Steamed English asparagus with anchovy butter and Parmesan” as a starter for £19.00 (plus 12.5 per cent service). One has to assume here, again, that regular customers see the whole experience as good value.
When it comes to our market, is there a risk the FCA might simply focus on the metrics and conclude “expensive” equals poor value? If so, this could pose a challenge.
The fight over fees
But I am not suggesting the appropriate response is to reduce fees. Absolutely not. The River Café can charge what it does because the demand for tables is greater than the supply. Just like the demand for professional advice.
One response which might be helpful to the FCA and clients will be to somehow better articulate the valuable services advisers provide.
When it comes to our market, is there a risk the FCA might simply focus on the metrics and conclude “expensive” equals poor value?
I read a blog the other day from The Reformed Broker, which seemed relevant. Entitled “It is nothing to do with which ETF to pick”, it looked at the real reasons why people who have accumulated wealth turn to an adviser. They want to know:
- How long do I need to work so my money will not run out?
- What would be considered a “safe” withdrawal percentage from my funds?
- Do I need long-term care insurance?
- Now that I am retired, should I invest my money differently?
- Can I afford to give cash to family members; and if I can, how much and how do I do it?
- Have I updated all my beneficiaries and picked the right people to take over my finances to make the best decisions regarding my health if I cannot?
- What am I going to do all day if my retirement is fully funded?
- Should I take a cash balance or turn my funds into an annuity?
- Do I own too much of my company’s stock?
- Will my plan still work if we have another “Great Recession?”
- When and how should I start taking money from my tax-deferred accounts; and how will this affect my taxes?
He continues: “Some investors can answer these questions for themselves, have confidence in the answers they come up with and then be disciplined enough to stick to a plan based on them. In my experience, the vast majority of investors cannot. Nor should they. Transference of expertise and success from one field (like medicine, real estate or law) to the realm of financial planning is not common. Smart or accomplished people are not automatically good with their own money. It’s not a question of intelligence, but of temperament.
“Another aspect of this is that it’s important to have someone to bounce ideas off; preferably someone who is accredited and trained to run the necessary calculation to provide meaningful responses. There is also an emotional component here. Some separation of decision making is extremely helpful, given how emotional we all become over money. And we are right for being emotional about our money – because money is freedom. Money represents options and choice. Who wouldn’t become emotional?”
And finally: “There’s one more key question for advisers to answer. Are my family members equipped to understand my portfolio, insurance situation and financial plan should something happen to me? We hear clients ask this question aloud, rhetorically, in meetings and on phone calls; very often when we’re early in the process. A true adviser identifies this issue, whether prompted by the head of the household or not, and moves to address it. This is not a morbid conversation at all. In fact, it’s the opposite. One of the key features of a successful adviser-client relationship is the peace of mind knowing that there are plans in place for any contingency.”
I imagine this describes the sort of adviser-client relationships most are selling. The problem is: how do you describe it in a disclosure document?
Malcolm Kerr is senior adviser at EY