While most of the industry has known that a mass conversion of percentage trail commission to percentage ongoing advice charges was occurring, it seems the FCA has only just noticed.
Although the FCA is probably right to suspect the motivation for favouring percentages is that the average customer cannot deduce the actual cost of advice from a percentage charge, there is another aspect to this. It is also possible that advice businesses have placed too much faith in percentages, when different advice charge models may more appropriate.
If the bias towards percentage charges is a sign that the market is fearful of sterling advice charges, is this fear justified? A simple example can weigh up how real any concerns might be.
A small business start-up is unsure whether to charge 0.5 per cent a year or £50 a month (CPI linked) for ongoing advice. The aim is to build up the regular advice charges to cover annual costs of £125,000.
If the business charged 0.5 per cent, it would need £25m of assets. Conversely, if it charged £50 a month, it would need 208 clients. If the same number of clients were equally easy to find regardless of advice charge structure, clients would need to invest £120,000 each if the 0.5 per cent model was pursued. Of the two models, which is most likely to be successful?
The wealth and income statis-tics would say £50 per month wins every time as there are not enough HNW clients. ONS stats say there are 3.8 million people with more than £100k to invest. Assuming 208 clients with at least this level of wealth are required to sustain an industry of 30,000 advisers, the market is 2.4 million clients short.
When viewed from this angle, it is difficult to rationalise why the market is resolutely backing percentage charges. Although fear may be part of it, I suspect it has more to do with a market that was very set in its ways and internalising advice charge deductions in products was made too easy by providers keen to preserve a financial umbilical cord with advice businesses.
But in the rush to convert from commission structures, have firms locked themselves in to unsustainable advice charge levels? Not only are income levels too low, but servicing costs are rocketing due to the “serve every customer” require-ment. This means huge numbers of low-end to mid-range clients will be unprofitable to service.
Although I am sure some businesses are better positioned, the stats on invested assets per capita will confirm that the market will need to revisit service propositions and that there needs to be a sustained effort to restructure and increase advice charges.
Another strong reason for ditching percentage advice charges is that I pay my adviser double what my wife pays for the same amount of advice and service. The market needs to find a new mindset and change some long-standing habits so that charges actually reflect the cost of advice and service provided.
Peter Jordan is head of marketing at Intelliflo