The Financial Conduct Authority (FCA) has put advisers on notice: it is going to look hard at the fees firms are charging clients.
By doing so, it may force advisers to publicly prove how their fees offer clients value for money.
In its Sector Views publication released last Tuesday, the regulator said advice clients ‘may not be getting value for money’ and that advisers may not be taking sufficient account of value for money when making a recommendation.
It also noted: ‘Relatively few advisers are transparent about their pricing before they sell advice. This does not incentivise advisers to compete on price and may result in limited pressure on them to reduce their charges.’
While reiterating that overall standards of quality had improved since the retail distribution review (RDR), the FCA acknowledged that less competition now meant firms that overcharged or underperformed suffered minimal damage through loss of business to competitors.
On the face of it, this looks like an attempt to strong-arm firms into charging less, a move which would be all the more controversial given the regulator hiked its own fees for advisers (the very same day).
FCA director of competition and strategy Christopher Woolard insisted the focus of the regulator’s comments was not on driving charges down. ‘There isn’t a magic number, but it’s about the clarity and quality of the service in relation to what you are being charged,’ he said.
Woolard added that clarity should cover the entire ‘value chain’, including the actual cost of owning an asset.
The FCA’s approach seems to combine four issues: cost, value for money, levels of competition and conflicts of interest, all of which can fall under the overarching bracket of suitability.
So where to start?
Darren Cooke (pictured above), director of Derbyshire-based Red Circle Financial Planning, said the regulator’s goal was a combination of transparency and a long-term project to lower charges across the board.
He said: ‘The FCA is still concerned that we are not getting transparency of fees, particularly with vertically integrated firms.
‘One of the RDR’s tenets was to price each part of the value chain so it is clear for the consumer. That includes having the fund management, product and platform charges as well as the advice charges made explicit. This puts the buying power back into the hands of consumers.
‘It’s easy as an IFA to look at valuations of some vertically integrated firms’ total costs of ownership, see a figure higher than 3% and scoff, but by the time you have truly taken all the costs of products, platforms, fund management and your independent advice into account, you’re probably over 2%.’
Nothing to hide?
A thorny issue for some advisers, which periodically makes a stir in the national press, is how few advisers publish their fees on their website. A survey by the Yardstick Agency found only around a third of advice firms (35%) show their fees online.
‘The vast majority of firms don’t publish their fees online,’ said Cooke. ‘I didn’t until recently, but it’s important not to confuse cost with value for money. Just because something is cheaper, it does not make it better value, and that is where the public might be misled by gravitating towards the cheapest option.
‘Proper transparency needs pressure from consumers to drive detailed costs and pressure from advisers to ensure we can provide clients with more clarity of costs associated with discretionary fund managers and platforms.
‘If a consumer has information on the individual cost to them for the whole process of the fund, the platform, the product and the advice, they can look at each element and buy that which they feel is appropriate for them.’
Stuart Jefferies (pictured above), director of Worcestershire-based Singular Financial Planning, said the FCA’s approach underestimated consumers’ ability to find out costs. He said: ‘It is about time the consumer was treated as anything other than a complete idiot. Value for money has little or nothing to do with cost. It is all about what the consumer gets from the relationship.
‘If they feel they are not getting value for money they are free to take their business elsewhere. Is a BMW costing twice that of a Ford value for money? Ask the purchaser, not the seller.’
What about the FCA’s charge that few advisers are transparent about the total cost of their services?
Jefferies said: ‘Where is the evidence of this? If [the FCA] has it, why is it not tackling the advisers in question directly rather than trying to change the rules we work under? If it is transparency it wants, great. For those that are transparent, there should be no issues but again transparency has nothing to do with value or cost.
‘The cost of advice is high because the FCA has insisted all advisers are highly qualified, constantly monitored, subject to regulatory scrutiny at every turn, hold appropriate professional indemnity insurance and cannot subsidise one client out of the earnings of another.
‘The value of advice can only be determined by the recipient of that advice. If they choose to stay with an adviser, they are probably satisfied they are getting value for money.
‘Levels of competition are low because of action the regulator took at the time of the RDR. This significantly reduced the number of advisers available to provide advice while at the same time making it difficult to make a profit from lower value clients.
Time for transparency
Not all advisers took issue with the regulator’s integral linking of transparency and value. Far from being wary about the publication of charges causing a race to the bottom, Oxfordshire-based Candid Financial Advice director Justin Modray has long been a noisy proponent of mandatory fee transparency.
He said: ‘There’s no doubt in my mind that too many advisers continue to charge excessive fees and potentially compromise their advice due to conflicts of interest, so it’s great to see the FCA voicing these concerns.’
Modray claimed his research of the biggest UK advice businesses found an even lower proportion publishing their fees on their websites, at just 5% of the firms he looked at.
‘This means most potential customers only find out how much the advice will cost when sat in front of an adviser, by which time they often feel under pressure to proceed,’ he said. ‘Since the FCA’s publication confirmed the average initial fee charged by advisers is 3%, perhaps it’s no surprise most advisers are coy about publicising such lofty charges.’
The FCA said: ‘More than 80% of advisers charge an upfront fee, which according to data collected by the financial advice market review is normally 3% (median value) of the assets.’
In an FCA survey of firms providing financial advice it found the median fee for £100,000 investments was 3%. That falls to 2% for investments between £250,000 and £500,000, and 1% for investments above £1 million.
According to the FCA’s analysis, the ‘middle’ 90% of firms charged between 1% and 5% for advice on investments up to £10,000, and between 1% and 4.5% for advice on investments of between £30,000 and £50,000.
Modray said: ‘With financial adviser fees mostly going up rather than down since the 2013 commission ban, the sector badly needs some fee competition. The best way to achieve this would be for the FCA to compel advisers to openly publish how much they charge on their websites.’
Ian Mason (pictured above), legal director in the financial services regulatory team at DLA Piper and a former head of department in the enforcement division at the Financial Services Authority, said each of the four key areas highlighted – cost, value for money, competition and conflicts of interest – tied into the regulator’s work on suitability.
He said consideration of more vulnerable clients ought not be overlooked.
‘What is more apparent here is concern about access to advice for more vulnerable consumers,’ he said.
‘If you have an elderly person who lives in a remote area and doesn’t have access to the internet, their options might be quite limited. Transparency is one of the key factors and ties into the Mifid II rules, which will be stricter on disclosure of fees and commission.
‘These rules will also make life harder for vertically integrated firms, which face an increased threat of regulatory action.
‘At the moment Mifid stipulates that firms should “manage” conflicts of interest, but Mifid II goes one step further requiring firms to “prevent” conflicts,’ he said.
‘If firms fail to comply with the FCA rules, enforcement action is a real possibility.’