The FCA’s asset management market study published in November will, in time, be considered a seminal moment in changing the shape of remuneration for all concerned in this sector.
Those who have commented on the paper to date have focused mainly on the impact on fund management companies, giving insufficient attention to issues regarding advisers. But consultants (ourselves included) warn of levels of remuneration for advisers being compressed too.
Such a downward trend has not been seen in the time since RDR came into force. Indeed, some propositions have doubled their charge, even though the level of service remains unchanged.
Recent press comment suggests some nine out of 10 advisers now refer the bulk of their investment advice to discretionary fund managers. But it is difficult to see how a charge of 1 per cent could be taken from a client’s assets for simply referring them.
Even if we accept there is a cost associated with due diligence before any referral is made, I would argue such a charge is excessive (unless, of course, the amount being referred to the DFM is under £100,000, in which case the percentage is not as important as the overall charge).
It would be more understandable if someone was to charge 25 to 35 basis points to monitor the DFM and prepare analysis of its performance against the benchmark, together with a performance analysis against alternative players in the marketplace.
If this was being done on an annual basis with triennial beauty parades, then it would definitely be reasonable value for the client. DFM due diligence should always be robust, as if it was being used by a charity or large pension arrangement.
But it is difficult to see how 1 per cent per annum can be charged for simply referring to a DFM, especially as the level of work done by the intermediary must only decrease in subsequent years.
Although the regulator is not minded to control fee levels, it is trying to control how services relate to charges. If the level of service is more than adequate and provides significant additional value, then there is nothing to worry about. Where someone’s financial plan is being fully implemented, monitored, reviewed and managed in the format agreed, then a 1 per cent charge is not necessarily excessive.
“It is difficult to see how 1 per cent per annum can be charged for simply referring to a DFM, especially as the level of work done by the intermediary must only decrease in subsequent years.”
The principles of pricing
On the other hand, if all that happens is an annual investment review, this is bound to come under increasing pressure from the regulator, as well as from the more informed clients. Poor disclosure creates confusion and makes complete transparency impossible.
I recently read The Psychology of Price by Leigh Caldwell, which lists the seven principles of pricing. I would thoroughly recommend taking a look, as it brings the client’s perspective into focus and reminds us we should charge on what is valued by them and not on our need to cover our fixed costs.
Clients need to be able to see what they are getting so they can appreciate it and compare it with alternatives. How we communicate our charges will be, for each of us, the long-term determinant of our success. Low charges are not the answer; justifiable charges are. That is what will enable long-term profitability.
Robert Reid is director at The Ideas Lab