This article is absolutely not about Mifid II. Really it’s not. But some of the themes from the upcoming EU legislation will force advisers to be much clearer about the value they add for clients.
Above and beyond
Clients are concerned about receiving good value. That is not news to anyone. The tricky part is letting clients and potential clients see and understand the value great financial planning advice delivers.
The real value of advisers who only manage money for their clients has always been questionable in my opinion. As a consumer, I am not paying an adviser 1% a year in fees for selecting a portfolio for me.
I realise I am an industry insider and some clients might see value in this service. However, I would not be recommending such a service to my mum or my close friends because the price and the value do not match in my mind.
In the post-Mifid II world this approach will seem an expensive add-on to the fund management and platform costs, and might well come under pressure.
But advisers who, in addition to recommending portfolios, get involved in tax planning, pensions advice, wills, estate planning, life goals and lifetime cashflows are likely to prosper in this new environment.
I did some work with a four-partner firm this year. I was encouraging it to raise its annual ongoing fees to 1% per year. One of the partners already operated successfully at that level, while the other three were looking to move their pricing upward.
As an exercise, I asked them to bring along three files each: a smaller client who just met their minimum requirements, a mid-sized client, and a large client at the very top end of their client list.
When we added up the cash benefits to clients over the life of the relationship, the average value added for clients when compared to the fees they had paid was about 7:1. That is, for every pound they had paid the advisers, they had received £7 in measurable cash benefits due to the work of the advisers.
Even if we doubled the adviser fees from 0.5% to 1% a year, that would be a value-added multiple of 3.5 times fees paid on average.
I believe most clients, when presented with this calculation of value added, would be more than happy with the fees they are being charged for a total package of services.
When you also add in the intangible value added, the peace of mind that comes from knowing someone has your back covered, the value proposition looks pretty good to me.
I have excluded what Vanguard calls ‘Adviser Alpha’, which is around 3% per year in their calculation of investment value added, simply because it can be hard to explain to clients. If you want to throw that in too, the value proposition looks outstanding.
The current debate about ‘how’ to charge feels like a distraction to me. When you disclose your fees in ‘pounds and pence’, it does not really matter if you charge a percentage of assets you manage, or a flat fee, or hourly rates.
The key question clients will consider is: ‘What am I getting for my spend and how do I feel about the relationship I’m having with my adviser? Do I trust them to do the right thing for me in all situations?’
The key focus for any advice business must be on who you service, the value you add and the price you charge. These have always been the core issues for advisers and Mifid II simply adds a little more fuel to the fire.
Brett Davidson is director of FP Advance.