Money Marketing reported last week the Financial Conduct Authority is “unsettled” by early research which indicates clients have a general lack of awareness of adviser charging despite the reforms brought about by the RDR.
Now, we do not have details of the research conducted but as with any survey the devil will be in the detail in terms of client demographic, the numbers involved, their experience of receiving financial services advice in the past and of course the methodology of the process; with all of these factors to some extent having an impact on the outcome.
Nonetheless, we should not be surprised, just six months into the brave new world post-RDR that many clients will not be wholly aware of the changes to the method by which intermediaries can be remunerated.
It is a generally accepted view that many clients (but not all of course) were of the opinion that advice under the previous largely commission based system was “free” and as an industry we did little to dispel this myth, what with all the smoke and mirrors around enhanced allocation rates and early establishment charges on investment bonds for example. It will take time for the new regime to bed in and for the paying public to gain an understanding of the various payment options open to them.
There is no doubt that the issue of adviser charging can be a thorny one and it is clear from reading industry press articles and the blogs that views within the adviser community are quite polarised, with some embracing the new regime with open arms while others believe it will be the death knell of the industry.
There are certainly a number of challenges facing advisory firms going forward, not least rising PI costs, seemingly spiralling FSCS levies and for many the need to set aside higher amounts for capital adequacy over the coming couple of years.
However, we believe that significant opportunities exist for well-run firms (both large and small, independent and restricted) that have in place a strategy to retain their existing clients and secure new ones resulting from the advice gap.
We have seen many examples of such firms when visiting them in our role as their external compliance consultant. They have thought carefully about their proposition. Many have segmented their client banks and identified through time recording which clients are profitable. No two have exactly the same service proposition or adviser charge structure.
The majority it must be said have opted to charge a percentage of the amount invested for both initial and on-going advice but many also offer alternative options including monthly retainers or hourly fee rates, the latter mainly for ad-hoc project based work. It is the case that the transparency brought about on adviser charging by the RDR has forced firms to think carefully about their price point with many worried about how their proposition compares to others, which is understandable.
But it is not all about price is it. Yes, we have all seen the surveys about how much clients are willing to pay for advice but ours remains a people business and if clients perceive they are getting value for money then they will not object to paying a fair sum for services rendered. What is absolutely vital here is for firms to ensure their advisers are well trained and able to deliver the presentation of the client agreement/terms of business in a way that highlights the benefits of the firm’s proposition and the value the charging structure offers in terms of service and added value. First impressions and the initial rapport building process are so important to get right and gone must be the days where the terms of business is viewed by advisers as a compliance document that is begrudgingly handed out with some apologetic comment.
In closing, we have to say that in our experience of reviewing client files, all are complying pretty well with the adviser charge disclosure rules contained within COBS 6.1A, albeit with some inconsistencies and errors early on. This is documented clearly within a separate fee agreement or highlighted in the text of suitability letters, with disclosure in both percentage and cash terms as required by the rules.
Simon Collins is managing director of RGP Compliance