When I worked full-time for a newspaper many moons ago, one of my jobs involved poring over screeds of reports and other documents from a variety of sources, including financial providers and regulators.
Not only was it important to keep up with developments in the area I was covering, as often as not a careful study of these reports meant it was possible to tease out some interesting news items buried in the small print of these papers.
So, hats off to Money Marketing news editor Justin Cash, who performed an excellent piece of work recently in his story about restricted advice firms charging their clients the same as fully independent ones.
All the more so as I worked my way through the same FCA data bulletin a few weeks ago and did not spot that little nugget tucked at the bottom of the page. Memo to self: read these things more carefully.
Justin is, of course, also completely right in his follow-up question: if it is true that, generally, compliance and other costs for restricted businesses will be less than for independent ones, why is it the case the former feel able to charge their clients as much as the latter?
A time-honoured trouble
A few weeks ago, I wrote about the process of advice firms gobbling each other up, then breaking apart, only to reconstitute themselves under different guises or ownership. My conclusion, back then, was this was a practice that had been taking place within the financial services industry since time immemorial.
To an extent, the same applies to charges. Some 20 years ago, I recall the Personal Investment Authority, the financial services regulator of the day, ordering a clean-up of the £2bn broker bond market.
Back then, more than 130,000 savers placed their money into some 1,300 broker funds, life funds or unit trusts specially created by advisers and “badged” in their name. In addition to fund management fees, usually 1 to 1.5 per cent a year, clients paid their advisers and additional premium of 1 per cent or more.
Unsurprisingly, the PIA found these funds were underperforming the indexes they were matched against by, on average, the additional annual management fee taken out of their clients’ total investment.
Yet for years clients themselves were unaware of what was being done to their money. Why? Because, despite angry campaigning by journalists such as Jeff Prestridge at the Mail on Sunday, as Justin elegantly describes the current position in his MM article, there was “a lack of price sensitivity that clients show to advice firms and their business models.”
The reality is the charges market in the advice sector is inelastic. That is to say, the demand for the service by those who use it is largely unaffected by the price charged for it. Consumers have only a limited idea of what they are being charged, what those charges relate to and what they get for the money they pay their advisers.
Always assuming they understand they are paying advisers at all: if the charges relate to leftover trail commission from pre-RDR days, they may not even realise they are handing over a slice of the overall fund management fee.
The key, then, is that of what happens as a result of this disclosure by the FCA, which Justin was able to ferret out so well. Back in July 2013, the FCA commissioned the adviser charging and scope of service report, from NMG Consulting, which identified a large number of barriers to consumers understanding what they were being charged.
A significant number of those barriers lay in basic matters of typography, such as font sizes; the use of colours and boxes to make statements stand out or, alternatively, to bury them; the use of industry-specific language to obfuscate matters; the use of percentages instead of numbers, of graphs and charts; all technical points that have an effect on consumer behaviour.
One of the most important points made in the report was not so much that the language or the design directly prevented people from understanding the impact of charges but that it acted as a powerful disincentive to that process of learning.
In other words, the report suggested people are not stupid: they “get it”, but the way information in a document is presented can serve as a “disruptive moment” – making it less likely they will want to know more.
The FCA will argue it is almost impossible for it to be prescriptive in terms of what suits some people better in terms of understanding the question of charges, compared to other alternatives.
Ultimately, like so many issues affecting the industry, this is one where the FCA is acting as an impotent ringmaster in the debate rather than seriously trying to affect what happens on the ground.
“The way information in a document is presented can serve as a ‘disruptive moment’ – making it less likely people will want to know more.”
The regulator should at least offer some basic guidance of the best ways of communicating charges to clients, perhaps by organising regional workshops with examples of what works well and what does not.
As for restricted advisers themselves, they seem caught between the desire to make as much money as possible from their clients, no matter how, and an understanding that the proper way to do it is ethically. Right now, for many, the less ethical approach is winning.
Nic Cicutti can be contacted at firstname.lastname@example.org