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Tip of the iceberg: FCA sets its sights on adviser charges


The FCA plans to shake up the investment industry after its long-awaited interim report on fund charges found active management fails to justify high fees for lacklustre returns.

The watchdog has put forward a number of reforms for the market, including an “all-in fee” for funds, greater clarity on fund charge communication, better identification of underperformance, and easier switching into better value share classes for retail investors.

Experts have argued the all-in-fee and other measures from the FCA, if enacted, could pose a challenge to the industry and lead to fund closures.

As well as making a number damning remarks about the performance of active funds after charges, the FCA also said it had “some concerns about whether intermediaries deliver value for money”.

Commentators argue this is just the beginning of more scrutiny on advice from the FCA.

Pricing pressure

In its report, published last week, the FCA recognised the “important role” advisers play in retail distribution. £163bn of gross retail sales in 2015 were advised, but the FCA said some developments in sector may affect competition in the space.

This includes adviser networks and vertical integration, the growth of model portfolios as well as third party ratings providers.

Former FCA technical specialist Rory Percival says the study is a “significant” document as he says that – just as with asset managers – there is “very little price competition” in the advice market.

He says: “No advisers really compete on price. Advisers and consumers are completely non-price sensitive around investment and pensions.

“From an economic sense, they need to be the buyers on the clients’ behalf so they need to do that thinking about cost and providing competitive pressures on costs and that is a kind of mindset that I don’t think necessarily all advisers are tuned to.”

Candid Financial Advice director Justin Modray recently stopped recommending M&G and Jupiter funds to his clients over concerns about the groups’ inflated administration fees on their funds.

However he says advisers are probably “the worst overall at providing value for money”.


He says: “Many financial advisers appear to have used the banning of commission to double their annual fees, from 0.50 per cent commission to a 1 per cent annual fee. They also tend to use expensive investment platforms for their convenience and some add insult to injury by outsourcing the fund management to expensive multi-manager or discretionary services.

“Investors have generally had a rotten deal for years. They deserve better than this and it’s fantastic news that this is finally on the FCA’s agenda.”

But Apfa director general Chris Hannant has hit back at the FCA’s attack on the value for money for advice.

He says: “If you want to look at costs you should look at margins as well. If there was a huge level of profits in this part of the sector then you would expect [the FCA to focus on advice], but since margins tend to be fairly thin…the price reflects the cost of delivering the service.

“The FCA has looked at the supply of the advice market under the Financial Advice Market Review already so to repeat this again 12 months later… I suppose the FAMR didn’t get the right answers.”

Going vertical

The FCA also calls into question whether firms such as St James’s Place, Standard Life, Old Mutual Wealth and Hargreaves Lansdown promote their own funds to advisers for their own interests or the end consumer’s.

The FCA says: “We have been told that the flow of money into in-house funds is growing” citing one adviser network which has increased assets under management in its in-house funds by £1bn over the last 10 months.”

As at 30 June 2016, 26 per cent of Old Mutual Global Investors net flows were through Old Mutual Cirilium portfolios, which is the OMGI multi-asset investment solution available to Intrinsic restricted advisers.

Old Mutual Wealth chief distribution officer Richard Freeman says for vertical integration to work it must offer “quality investment performance” and that “suitable investment solutions are central to ensuring great customer outcomes”.

He says: “We aim to blend capabilities across our business, but the decision about which investment solutions are right for each individual client remains with the adviser, where client suitability decisions will always remain sacrosanct.

“We have robust processes to ensure that when an adviser recommends a fund from Intrinsic’s pre-researched panel of solutions they can have full confidence that it has been researched to an incredibly high standard.”

Assets in HL multi manager funds rose by £700m in the year ending 30 June. Conversely, Standard Life’s restricted national advice firm 1825 has a limit in place so that client portfolios can only hold up to 30 per cent of assets in Standard Life Investments funds.

Percival says the vertical integration focus from the FCA is a “very strong and emphatic reiteration” of some of the key things firms should be thinking about when firms put together the business and the investment proposition.

He says: “One of the things the FCA has always said is that if an adviser is recommending a solution that has a high cost than some other solutions there needs to be a good reason for that and if that good reason is relevant to that client and it is also commensurate with the additional cost concerned.”

Being upfront about fees

While the asset management industry had feared the FCA would put a cap on fees the regulator shied away from the idea with chief executive Andrew Bailey saying such a cap would be a “measure of last resort.”

Since no cap will be put on asset managers fees, Percival says it’d be “inconceivable” to cap advisers’ fees.

He says: “A price cap is a really heavy handed approach so you are only going to use that if really necessary.”

Experts argue the FCA’s solution of an all-in fee may lead to fund closures.

Investment consultant Daniel Godfrey says a combination of an all-in fee and greater transparency on funds’ objectives, measures and timeframes could lead to fund closures because “people would have a much clearer way of judging whether a fund is failing or succeeding.”

No advisers really compete on price. Advisers and consumers are non-price sensitive around investment and pensions

Gbi2 managing director Graham Bentley says: “Business have to pay much more attention to how much costs effect the transaction but [the all-in fee] might not be easy to do. You can see more fund closures if you have an all-in one fee as people will be much less likely to launch new funds which itself might be a good thing.”

Chelsea Financial Services managing director Darius McDermott adds: “There always appears to be more funds opening so it seems to be no shortage of ideas within the fund management community to launch new products but there is also a focus on where there are going to be funds with smaller assets under management, that are not getting traction and maybe are more passive type or core plus type funds charging a reasonably expensive fee.”

What’s next?

Despite FCA’s Bailey saying passive management is not better than active, the regulator’s report has drawn a clear conclusion on where active management fails to give value to clients.

Godfrey says active management has to be more differentiated from passive to prove it is value for money.

He says: “For active to succeed it has to stop trying to beat the market over a relatively short period of time and it has to be confident that if you are an active manager and can’t beat the market over a long period of time then the message is that you don’t have the skill.”

Meanwhile, Percival expects a separate piece of work on advice from this FCA paper which could “tinker” some aspects of advice such as disclosing ongoing charges in cash terms every year.

Bentley says: “The investment industry will work through some of the FCA recommendations but as the Investment Association said, ‘we’ll have a look at this and see how effective [the recommendations] might be’, that doesn’t fill me with confidence.”

Expert view

Jeremy Fawcett
Head of direct

At first glance the interim report may give comfort to those with vertically integrated models. It highlights that the FCA has not found abuse of vertically integrated structures in the form of unfair promotion of own-funds.

However, the point of vertical structures is to own more of the value chain and the FCA is correct to identify that this may well create a ‘commercial interest’ to favour own-funds or investment solutions. Given that it thinks that this raises questions about ‘competition dynamics and value for money’ it seems inevitable that further investigation will follow.

This won’t necessarily lead to a clamp down on vertical integration per se – particularly because it can help to deliver the efficiencies that the FCA desires – but more intense scrutiny and guidelines may follow.

Overall, platforms are seen to be enablers of market access for fund managers and the increased prevalence of centralised investment propositions within advice firms is a deliberate effect of the RDR. So in some ways the FCA are supportive of aspects of vertical integration but that won’t stop them from policing it rigorously.



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There are 25 comments at the moment, we would love to hear your opinion too.

  1. Is this industry different from any other such that it merits nannying and special attention?

    For far too long we have been regulated as if the typical consumer is feckless, illiterate and totally incapable of making value judgements.

    Canny consumers shop around for the best deals (as they see them) and seek to shave £5 from annual car insurances/buildings insurance. These self-same consumers are adjudged incapable of assessing whether they receive value for money, whatever that is.

    Caveat emptor has its place and we should reflect of Professor Jim Gower’s wise works when he helped design the original financial services act, that consumers should not be made fools of but should be allowed to make fools of themselves.

  2. Did I really read that ‘some aspects of advice such as disclosing ongoing charges in cash terms every year’.

    I despair. They never learn. In there pursuit of utopia the reports we write and information given to clients is that ridiculously complex and bureaucratic that frankly the average person is totally confused.

    I have no issue with disclosing charges in cash, percentages or any other way (as we have always done) but when the elephant in the room like some of the companies mentioned in this article are doing what they do in plain sight and with no questions from the regulators, I have every reason to despair.

    All decent professional IFAs do.

  3. Neil F Liversidge 25th November 2016 at 9:41 am

    I have some concerns about whether regulators deliver value for money. One reason is the fact that they reauthorise scammers so that they can repeat their tricks under a new firm. Anyone heard of BlueInfinitas and Assured Review? Maybe the FCA should take the beam out of its own eye before it tries picking the specks out of ours.

  4. Most garages round here charge about £60 an hour plus VAT. I shopped around and got one to fix my brakes for £30 an hour, cash in hand.
    The plaster comes off next week and I may be allowed home soon.
    (yes this is sarcasm)

  5. This is a huge wake up call. As soon as the FCA was warned off the Banking Culture Review it had idle hands and a need to prove its existence. RDR allowed the regulator to interfere with the client/adviser relationship. It is a very small leap to end up price control.
    Now add in a combined PI and FSCS charge and the sector will suffer “death by tinkering”.

    I sent out 8,000 emails on this subject this week 75% didn’t open it. Wake up guys this is he perfect storm.

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    All we ask is that you take the time to watch either one of them, then decide for yourself if Libertatem is for you.

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  6. The only thing I despair at is that the headline in this article in no way relates to the paper produced. The FCA have been talking about value for money for years and at the recent Positive Compliance session I attended actually gave poor practice examples of what they see. Quite frankly I agreed that what they were describing was poor value for money for clients. Lets focus on the facts rather than what “industry commentators” or ex FCA employees say

  7. Perhaps it would help if the FCA actually articulated what it wants and expects in more detail. What is an acceptable level of fees against services provided? Unless we know we’re left guessing. Which in itself distorts competition because the ‘good firms’ will seek to comply with this mysterious and unknown standard whilst the ‘bad firms’ will just wait until they’re told. Do the FCA think through what the practical effect (i.e. behavioural compliance implications) of their actions in this respect will have?

    It’s all very well saying that price regulation is a last resort but it will come with some potentially serious consequences. The two that immediately spring to mind are firms pulling out of the market because it’s no longer commercially viable (Hannant’s point on margins) and a dumbing down of the quality of service and advice to accommodate – or, if the changes in the definition of advice go through, a move away from advice to guidance. More people will get it but tough luck when it goes wrong (unintended consequence no. 257). At least that will de-risk advisory businesses so there is a bonus for firms going down this route.

  8. I have to agree with Suzanne. The Positive Compliance workshop I attended in Norwich put my mind at rest in this area and even though I have heard Mark Gould ( a good example of the type of individual I would want to work at the regulator) present these a number of times now, I always leave clearer about what is expected. @Grey Area…I agree with most of what you’re saying but if you don’t attend the sessions they put on telling us what they want, then we can hardly complain.

    • I agree the Positive Compliance workshops were very good. I attended two early on in the year near Bristol despite living in Kent. Worth going to early out of area.

  9. “No advisers really compete on price”

    Oh really? Well I know one adviser who competed on price for 25 years. ME. I worked what I plagiarised as “Never knowingly undersold” and can categorically state that very few advisers matched my charging structure. However I do know other advisers who also charged reasonable and cost effective rates. I was not unique.

    Yes I made a living. No I didn’t make tons of money, but I made a comfortable living, never had to ‘prospect’ for clients and only had 2 complaints in that time. One was found in my favour and the other was dropped.

    I will also concede that I have come across some disgraceful charging practices where fees are charged for assets under management and then there is what can only be described as a ‘hand holding’ charge in addition. I do think that adviser charging can well stand some scrutiny. SJP anyone?

    I see too many examples of unnecessarily high running costs and complete profligacy in the running of some businesses. Perhaps that is where some firms need to start. Do you really need all those paraplanners? Can’t you research and write reports yourself? Perhaps you need to put in a few more hours if you think turning up at 0900 and knocking off at 1730 is a good day’s work.

  10. Advisers are the worst at providing value for money?? I would beg to differ. The FCA in terms of value for money are far worse!!
    How much does our industry pay to the FCA and what do we get back? We don’t even get concise guidance as to what is expected, it is always smoke and mirrors leaving us to interpret what they mean.

    Also, lets not forget that they have no competition, therefore they can charge what they want….. and we have to pay it!

    I wish I had a business where I could write out to clients every year and dictate to them what they are going to pay me next year. Hmmm, this year I am going to be buying £1.8m of artwork for my office (just like the FSA did), and client fees are going up to pay for it.

    Makes my blood boil to think that none of the FCA have any idea as to what we actually do! When are they ever going to actually work with the people who are at the coal face?

  11. Rory Percival says the study is a “significant” document as he says that – just as with asset managers – there is “very little price competition” in the advice market.

    He says: “No advisers really compete on price. Advisers and consumers are completely non-price sensitive around investment and pensions.

    …Shows how little he really knows then! Move on, nothing to see or hear with this chap. He’s just making noise to try and show everyone that the shackles are off and he is now out there for hire!

  12. If you climb a ladder you can factor in a risk fee. This fee increases with height in consequence of the risk of falling. A steeplejack who scales buildings, chimneys and church steeples does not work any harder but his fall will be a lot harder!

    What differs is the consequences of a fall and that is why a steeplejack can command a premium fee. Now tell me what fee should be charged by an intermediary who in return agrees to be outlawed and thereafter subjected to Financial Services and Marketing Act 2000. An Act that grants the regulator such powers that they are not even accountable to Treasury Ministers the Courts or to Parliament (as confirmed by Hector Sants 9 March 2011).

    There is no longstop, no Statute of Limitations, no Right of Appeal and No Rules of Evidence applied in complaints. Liability is unlimited! What differs for an intermediary is not the work but the consequences of a fall and that is why advice commands a premium fee.

  13. Richard Freeman says “We have robust processes to ensure that when an adviser recommends a fund from Intrinsic’s pre-researched panel of solutions they can have full confidence that it has been researched to an incredibly high standard.”

    If it was researched to such an incredibly high standard how was Vanguard Lifestrategy missed?

    • I agree. I outsource some of my research, but then make my own decisions. The firms I have used for outsourcing invariably look at past performance figures and make decisions based on that. I looked at the FACTS and figures for Lifestrategy and concluded it made sense for me to use them in client portfolios years ago. Ironically the firms I outsourced the research for are now reccomending we use them as core holdings….. they base this of course on past performance and ironically that is the past performance MY clients have had for the last 3-5 years!

  14. The points made in the article are not wrong. However, has the writer considered the consequence of someone doing nothing and paying no fees. I.e. Scuppering their money as they please
    Irrelevant of fees, advisers ingrain a routine of savings and valuable tax advice that goes above and beyond charges. This concept is Less 2D

  15. Vertical integration is fine, as long as any advice given is not described as (or sjportrayed as) “independent”.
    How can it be, when money/margin is earned by the firm from something other than the giving of the advice itself??
    As for some (presumably they didn’t say all?!) advisers not providing “value for money”, does the FCA now want to exit a free market and just dictat everything??? Of course in relative terms someone’s always going to offer different terms to someone else – imagine the alternative!!!

  16. Again, I think some fellow advisers are missing the point of the report. It specifically refers to vertically integrated firms and the extra layers of costs associated with Model Portfolio’s.

    If you think of the Old Mutual model, Intrinsic has added significant scale to OMW’s funds and platform. Yet OMW Cirilium still charges 1.24%, and OMW still takes the same platform charges they did 2/3 years ago. It is certainly not the client that has benefited from the scale that Vertical Integration clearly brings.

    An IFA has the flexibility to be able to add value by adopting fixed fee providers/platforms and be completely impartial in fund choice. I think those advisers that have incorporated all these things into their proposition have nothing to worry about. Shoehorning, on the other hand only really benefits the shoehorner.

  17. Shoehorning into a ready made suite of products (which clearly has vested interests) and charging 1% for the privilage, is hardly value for money. Especially if that suite of products main objective is asset gathering/and profiting at the expense of the client.

    I see advisers saying that clients have a choice, they can shop around and find a better deal. But they don’t, they put their trust in us. We all have a responsibility to change this industry for the better, rather than sitting around and moaning about everything the regulator does.

    • Spot on , first class. I have discovered that ‘shoehorning’ is rife. A choice of 3 or 4 models – take it or leave it – and they do take it because they are misled into beliving it is good for them and even on occasion that it is bespoke (when it isn’t). It’s a lazy way to run things for the client that maximises profit and minimises cost for the firm.

  18. ‘Some’; come on FCA define ‘some’, define geographically which areas. if i wrote’some’ in my advice reports would that be acceptable to the FCA I wonder. Why does my petrol cost ‘xxx.9p’ wherever I buy it? Perhaps this could be investigated (again!), or why motor main dealers charge so much, based on the ‘fear’ from motor users, of going elsewhere?
    The FCA reminds me of a rhinoceros; ‘pointed’ at the front end, ‘short-sighted’ and ‘charge’ a lot!

  19. It really is a shame and inevitable, that we “will” be driven by the FCA to a place where the only flavor is vanilla, your suits will come in just one colour and very-one will drive a Ford Focus.

  20. And then announces it is looking at relaxing the cross subsidy rules for certain adviser companies.

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