An FCA survey suggests advisers across the board have increased their ongoing charges since the RDR, but may not have added many additional services, Money Marketing can reveal.
The regulator reviewed 45 firms of varying sizes last year, including both restricted and independent models, to explore what ongoing services advisers were providing to clients and at what costs.
Money Marketing has obtained the results via a Freedom of Information Act request, which covers aggregate data for nearly 85,000 clients who paid an ongoing adviser charge on around £2.5bn of assets under management, for which the firms reported generating fees of at least £50m.
The vast majority of ongoing charges are percentage based, with more than 96 per cent levying fees on this basis across service levels.
Across all service levels and all levels of assets, there were just three reports of firms decreasing ongoing charges in the past two years.
This compares with 34 reports of firms increasing ongoing charges for at least one service level or level of assets.
While firms may have upped ongoing charges since the RDR, Lang Cat consulting director Mike Barrett says some may have dropped initial fees to build in more recurring revenue.
He says: “It is worth noting the nature of advice has changed dramatically since the RDR, and especially pension freedoms. At-retirement planning – which is where most advisers are at – is much more complicated than a simple accumulation case, and also more valuable to the client.”
Scoping out ongoing services
The FCA listed 14 separate services that could be offered as part of an ongoing interaction, ranging from updating fact-finds, advice on adding to existing investments, reviewing cashflow models, providing performance updates, rebalancing and reviewing third party service providers like platforms.
While no firms removed any of these services in the past two years, there were scant reports of any of the 14 specific services being added.
Two firms added a cashflow review at their most basic service level as part of their ongoing charge, and one firm added the provision of a letter to confirm the outcome of a review across two service levels.
No firms added any of the other 12 services to their ongoing package over the period.
National IFA Helm Godfrey chairman Danby Bloch says how little services have changed is a “striking” finding of the review.
He says: “Where there have been price changes they have almost entirely been upwards. The lack of change has also applied to services provided.
“Reviews are mostly annual, although unsurprisingly some advisers carry out rebalancing and performance updating more frequently.
“At least half of clients don’t get cashflow planning as part of the service for which they pay ongoing fees – which is disappointing. Some advisers do provide it, but as an additional service at an extra cost.”
At the basic service level, it is most common for advisers to offer an updated fact-find and attitude to risk after a meeting on an annual basis, with 70 per cent doing so. Only 13 per cent offered this on a six-monthly basis, but two out of the 39 firms who answered the question said any update was not available on their most basic service level, not even at an extra cost.
The majority of advisers conducted a rebalancing exercise annually at the most basic service level. Only one did this quarterly.
Just 64 per cent of advisers said advice on top-ups to existing pension or Isa arrangements was included in their ongoing charge at their lowest service level.
of advisers offer a review and updated fact-find annually
1 in 45
advisers rebalance quarterly as part of ongoing service
reviews were missed because clients declined
All firms included client access to an adviser at any time with queries as part of their basic ongoing charge. However, a quarter said they did not offer access to paraplanners or other staff as part of the fee package.
Under Mifid II, many compliance experts say the rules would require a report or letter to be sent to clients even when a recommendation is to hold at an annual review, but currently at the most basic service level, 44 per cent of advisers do not provide a review confirmation report in all circumstances.
The FCA also polled advisers on which form of investment solution had the highest percentage of clients in: single fund propositions such as multi-asset, a non-discretionary portfolio such as a model solution or a discretionary investment service.
When it comes to discretionary services, 28 of the 40 firms that responded said the highest proportion of their clients were in non-DFM model portfolios.
Barrett says non-DFM model portfolios will be where “Mifid bites hardest, with the increased requirements for cost and charges disclosure”.
He says: “If advisers are struggling to give a decent ongoing service then for these models it’s just got worse.”
Bloch agrees: “A lot of advisers still need to catch up with annual monetary disclosure of charges under Mifid II. It will be very interesting to see how Mifid ll impacts on adviser practice and charging this year. I suspect that many will have to do more for their clients and some will find charges coming under pressure.”
No firms increased their ongoing charges where clients received a DFM service, either in-house or third party, and three in 20 said they decreased the ongoing charge where clients received a DFM service.
Bloch describes the finding that the majority of advisers seem to charge the same fee regardless of whether the client is provided with discretionary investment management as a “surprising” result.
Failure to review
The data also reveals that thousands of scheduled client reviews did not take place last year.
Across 27 firms, 7,300 clients at the most basic service level missed out on their planned review and 338 rebalancing exercises did not take place.
Fewer clients at higher service levels missed either a review or rebalancing; 174 missed their review at the second service level across 18 firms, and just 37 missed their review at the top service level across the four firms that reported the data.
Almost 2,000 reviews were missed because the client declined however, compared with just 150 that were at the fault of the firm or adviser. Nearly 3,000 clients across 26 firms cancelled their ongoing service or charge for the year ending 31 March 2017.
A total 37 complaints were levied about ongoing services, with only six of the 45 firms reporting they received a complaint. Meanwhile, 34 clients were offered some form of refund on their ongoing service charge.
Adviser view: Keith Churchouse, director, Chapters Financial
It’s not surprising ongoing charges are going up given rising costs from a regulatory point of view, but its also a positive thing in that it comes from the amount of technology being invested in to improve services to clients – particularly as some providers are consolidating and reducing services, so we are mopping up where some of those have left off.
It’s when clients are in the dark that problems start to occur. Communication to the client is key, but its a two way street. A client has to want to receive communication, but that doesn’t stop us being prepared to provide it and keeping an eye on their investments.
It’s still our responsibility to provide ongoing advice, particularly when we are charging a fee for it, and as long as those communication lines are kept open it’s an issue of trust.
Clients have to trust us to deliver what we say; that’s why they stay with us.
Advisers vary as to how often they re-disclose their ongoing service costs and services provided to the client.
Nearly half offer a description of the ongoing service provided every year, but 33 per cent only do this when there is a change in the service.
A slim majority disclose ongoing charge rates once a year, compared with 18 per cent who only re-disclose when new business is conducted.
However, one firm reported it never re-discloses either a description of the ongoing services provided, the rate of the ongoing charge or its cost in monetary terms.
The FCA says the work formed part of its general supervision of advisers.
It writes: “Data from this survey and many other sources inform our sector views [and] are taken into consideration when we determine whether further FCA activity is warranted on any particular topic or firm.”
However, the FCA notes that it “did not verify or check the accuracy of the submissions and therefore it is not possible to make any robust determinations from the data.”
Expert view: Mifid will leave its mark on ongoing advice
This FCA assessment of ongoing services shows what a sticky business investment advice is. Sticky in the sense that client turnover is low but also in the sense that there was little change to services provided over the two years. According to the study few firms introduced new services, differentiated service levels or changed pricing. The question is: will this change post Mifid II?
Mifid II not only introduces greater fee disclosure – with the potential for unsettling clients – but it also significantly increases the standards for ongoing suitability reviews. Alongside the suitability of investments firms must now consider changes to the client’s:
- Knowledge and experience;
- Financial situation including their ability to bear losses;
- Investment objectives including risk tolerance.
Ninety per cent of firms in the sample provided an assessment of ongoing suitability at least annually.
We know from our own work that manual preparation of a review report can take as long as half a day or even a day. With the additional work required by Mifid the time and cost of completing a review this way grows too.
The average client in the FCA survey had £136,000 invested and paid around £1,000. At this fee level, efficiency is crucial.
Against a backdrop of increased fee disclosure there will also be a greater need for the firm to demonstrate their value so that clients continue to remain sticky.
The use of investment process technology to achieve not only suitability but efficiency while demonstrating the firm’s value will be key.
Ben Goss is chief executive at Distribution Technology