Over 90 per cent of advice firms have taken a long hard look at their approach to adviser charging in the last two years, according to our survey for the latest Platforum report – UK Adviser Market: Costs and Charges. The most glaring trend is towards cutting charges for higher value clients and increasing them for those nearer the bottom end of the scale.
Advice firms tell us they review their charges regularly, usually annually or every couple of years. However, Mifid II has had a part in nudging advisers into reviewing how they explain charges and what charges are for. This has resulted in about half of the firms altering their charging structures following these reviews.
Results of adviser firms that changed their charging structures after a review – 2018 and 2019
Source: Platforum, May 2019 Question: What is the main impact of the charging review? Base: 2018, 78 advisers; 2019, 87 advisers
Increase in fairness/transparency
The main impact of adviser firms’ reviews has been for them to implement some kind of increase in their charges within the last two years.
Over a quarter of firms increased their charges across the board for all clients, and another 40 per cent of firms increased their fees for just their low value clients, who tend to be less profitable. These firms also reduced their fees for higher value clients in order to stay competitive.
Advisers see this type of adjustment as a way to “increase fairness and transparency” in their pricing structure. This was the main driver for the change according to 57 per cent of all firms that changed their charging structure after a review. It can also boost profitability. All of these firms charge ongoing fees based on a percentage of clients’ assets. These would mean proportionately higher fees for higher value clients in the absence of pricing structures that reduce the percentage charges on a tiered basis.
The Mifid II cost disclosure requirement may have prompted some of this recent awareness of transparency issues. Advisers on the whole report very little client pressure on adviser fees in response to the Mifid cost disclosure reports. But advisers report much client confusion about how to interpret these reports, and so advisers need to take time to explain the value of their advice and other services, as well as other charges disclosed in the document.
But one in five adviser firms of all sizes tells us they have reduced their charges for all clients as a result of their review. Nearly all said the main reason for this change was to offer clients more flexible options or to increase fairness and transparency. However, some admitted client pushback on charges was the root cause for the reduction.
Regulatory change still one of the main drivers
Regulatory change was the second most cited reason for altering – mostly increasing – their charges. 40 per cent of advice firms attribute their decision to change their charging structure, slightly up on last year’s 36 per cent.
In this context, regulatory change encompasses several possible drivers – ranging from making their charges more transparent in light of Mifid II requirements to putting their charges up to cover at least some of the rise in the FSCS levy, FCA costs and other regulatory expenditure. In particular, many advisers have experienced year-on-year hikes to their professional indemnity premiums, especially if they have advised on defined benefit transfers.
Mifid II product governance rules, or Prod, is another regulatory development that may lie behind some changes to advisers’ charging structures. Over a quarter of firms said the changes to their charging structure were the result of a client segmentation process.
The FCA’s Prod rules require advisers to assess the compatibility of products with the needs of clients and the product manufacturers’ target markets. This regulatory imperative, together with normal commercial needs for management information, may be providing advice firms with the motivation to have client segmentation processes.
Recent regulatory changes – particularly Mifid II and Prod – are leading advisers to take a closer look at the basic economics of their businesses. They need to cover their costs, which have been increasing considerably in the past few years, but they also have to focus on clients and services where they can provide real value.
Mariam Pourshoushtari is an analyst at Platforum
For more information on Platforum’s UK Adviser Market: Cost and Charges report, contact firstname.lastname@example.org