In the Financial Conduct Authority’s Sector Views paper, published this week alongside its Business Plan and Mission, the regulator commented extensively on advice fees and suggested consumers ‘may not be getting value for money’.

Now the FCA is talking about how much advisers charge for advice, it is fair to ask where it gets its numbers from.

For its claims the FCA is drawing on a research document, undertaken as part of the Financial Advice Market Review (FAMR), and quietly published last year. Fees are not the only thing covered in the paper, which asked about the advice gap, pension transfers and automated advice too.

We decided to dig into the research, and have pulled out some of its key findings. These will go some way to explaining where the FCA is coming from and where it is likely to go.

In the Financial Conduct Authority’s Sector Views paper, published this week alongside its Business Plan and Mission, the regulator commented extensively on advice fees and suggested consumers ‘may not be getting value for money’.

Now the FCA is talking about how much advisers charge for advice, it is fair to ask where it gets its numbers from.

For its claims the FCA is drawing on a research document, undertaken as part of the Financial Advice Market Review (FAMR), and quietly published last year. Fees are not the only thing covered in the paper, which asked about the advice gap, pension transfers and automated advice too.

We decided to dig into the research, and have pulled out some of its key findings. These will go some way to explaining where the FCA is coming from and where it is likely to go.

Segmentation

The FCA based its report on a survey, carried out in November 2015, of 233 firms active in providing financial advice on retail investment products. This included financial advisers, networks, appointed representatives, banks and life companies, and represents approximately 21% of the total number of advised retail investment product sales transactions within the population of ‘relevant firms’.

In charging for investment advice, the median initial percentage fee was 3% only for investments up to £100,000. The charge declined to 2% for investments between £250,000 and £500,000, and to 1% for investments above £1 million.

In terms of the spread of charges, the FCA’s analysis showed that the ‘middle’ 90% of firms charged between 1% and 5% for advice on investments of up to £10,000, and between 1% and 4.5% for advice on investments of between £30,000 and £50,000.

So the 3% cited in Sector Views refers to the lower net-worth clients who make up the majority of firms’ client banks.

Linking fees to assets

The regulator asked firms a number of questions about their ‘standard’ advice proposition for various quantities of investable assets, for initial and ongoing advice, and for new and existing customers. Around half of the respondents had a tiered charging structure, and the FCA observed most firms appear to charge on a percentage basis for initial advice. Here, we can see that the median initial fixed-fee for advice on investments up to £10,000 was just under £700, whereas on larger investments (£30,000 or more), it was £1,000.

Most of the firms surveyed had relatively similar initial fixed-fees for investments up to £50,000, but the spread of these charges across firms increased with investable assets. The report also found firms with hourly charges. It said: ‘Firms’ responses indicated that initial hourly charges for investment advice were broadly independent of investable assets. Across all the levels of investable assets, the median hourly charge for initial advice on investments was £180 per hour, and, in terms of the spread, the ‘middle’ 90% of firms in our sample charged between £100 and £300 per hour.’

Ongoing advice

The median ongoing percentage charge for investment advice was between 0.5% and 0.75%, depending on the amount of investable assets. For investments up to £30,000, ongoing percentage charges ranged from 0.5% to 1.3%, based on the ‘middle’ 90% of firms in the sample. For investments of £500,000 or more, the range of charges was lower, with the ‘middle’ 90% of firms charging between 0.3% and 1%.

However, the FCA noted that there was some variation in percentage fees for ongoing advice depending on the size of the firm. The median for mid-to-large sized firms across all investable asset segments was higher than those for firms categorised as ‘small’ and ‘very small’.

The FCA highlighted that advisers may be overlooking the need to inform clients of the total costs of owning an asset, including those accrued from fund management, platforms and products. Where there are higher percentages associated with large vertically integrated firms does not necessarily justify outrage, as most fees already include all of the above rather than just advice charges.

Paying for pensions

Charging structures for pensions accumulation and retirement income advice took on a very similar pattern to those associated with investments. This related to both initial fees, as detailed above, and ongoing percentage fees. For pensions accumulation advice, for example, 90% of firms charged between 0.25% and 1% with the median at 0.55%.

For retirement income, initial percentage fees were 3% on pension pots up to £100,000, 2% for a £250,000 pot and 1.5% for £500,000 pots and 1% for those over £1 million.

The median fixed initial fees were £750 for pots up to £10,000, £960 for a £30,000 pot and £1,000 over £50,000. Hourly charges, however, varied from £100 to £300 for the ‘middle 90%’ of firms.

The median percentage for ongoing advice was around 0.5% across all pot sizes, but the ‘middle 90% ranged from 0.3% to 1%.

Insistent clients

The FCA also looked at firms’ dealings with insistent clients, particularly on controversial activities such as defined benefit (DB) to defined contribution (DC) pensions transfers.

The regulator is planning to publish a consultation on its rules around DB transfers ‘in due course’, it revealed earlier this month, and its FAMR research may inform this. More than half of the firms surveyed indicated that they wouldn’t advise a client insisting on a DB transfer, either for new and existing governments.

However, nearly half said they would both advise and transact for clients insisting on transferring out of other safeguarded benefits schemes.

Provider problems

The FCA also looked into the problems advisers encounter when dealing with providers on behalf of their clients on retirement income advice. This appears to vindicate the FCA’s push for transparency and disclosure, and the emphasis on ensuring consumers have as clear an understanding as possible about exactly what is on offer and the charges they will incur.

DB transfers

Much has been made of the rise in DB transfers since the pension freedoms, and the FAMR research provides an interesting insight into the discrepancy between those coming to advisers for the first time and those already accessing advice in terms of demand. Requests for DB to DC transfers in new customers spiked substantially, while for those under advice, the increase was seemingly much more manageable.

Tech-NO

Part of the regulator’s mission is to improve access to advice through creating an environment in which firms can leverage technology to maximise efficiency and create lower cost propositions. The study indicated that the vast majority of firms had no plans to implement any substantial technological advancements within the next 12 months, with only 1% expected to be utilising any kind of automated solution by the end of last year.

Ageing engagement

So what is holding advisers back from deploying a more technological solution? The majority of advisers put this down to customers preferring interaction. This may be the case currently with many firms dealing predominantly with at-retirement business, but the regulator is keen to support innovation to cater to future generations more accustomed to instant digital access.

The advice gap

Access, particularly for lower net worth or vulnerable consumers, is another priority for the FCA in the post-retail distribution review world. Part of the survey focused on the obstacles advisers perceived to being able to cast their net wider, and found that two thirds cited fees and levies as a ‘very important’ barrier. Nearly two thirds also said the cost of compliance with FCA regulation was equally important.

The FCA’s announcement this week that adviser’s will pay 4.7% more in regulatory fees this year, and the plethora of regulatory developments expected in the next year, would indicate that these problems are not likely to be addressed any time soon.