I can only imagine how hard it is to illustrate your value as advisers when the subject of fees comes up.
We are used to shopping around for a good deal, but while comparisons are pretty easy when buying a car or computer, professional services – and financial planning in particular – face a unique communications challenge.
I must admit that, before I started covering the world of financial advice, I may have fallen into that camp of infuriating prospects whose first question would be “how cheaply can you do it?”.
It doesn’t take long to realise that’s not how the modern advice profession works, which is why I find it disappointing when reductive studies like Which?’s efforts this weekend emerge.
I’m not downplaying the importance of the debate on costs by any stretch. I still think there are a significant number of advisers charging too much for delivering too little. While people should have the flexibility to charge more or less depending on service offered, I think we can all agree there are limits as well – something like 5 per cent ongoing, say, would be impossible to justify.
But the debate isn’t best served by headlines like “Cost of advice from an IFA can vary by 1,000%”; there’s just so much more to it than that.
Moving the conversation on
Firstly, let’s have a look at Which?’s methodology. 108 advisers were asked what they would charge in three different situations. The results are below, courtesy of the Sunday Times’ reporting.
My first question is as follows: what are these charges for exactly? Are they just initial? Do they include execution fees? What about ongoing charges? Is this just for advice, or for platform and/or underlying fund selection too?
The Sunday Times notes 70 per cent of the advisers said “charges were calculated in proportion to the amount of money they were asked to manage” – i.e. an ad valorem fee – but also that “fees are higher the more you are investing”.
While technically speaking that is true, it almost makes it sound like you should be investing less to keep the costs down. At the very least, it fails to mention that advice, fund and platform costs all taper down as pot size increases in the vast majority of cases when charging percentage fees.
What about fixed or time costing, since the study also finds 60 per cent of advisers charged some kind of flat fee? Correct me if I’m wrong, but wouldn’t you need far more information that just “investing a £100,000 inheritance” or “drawing an income in retirement” to calculate these appropriately?
The adviser respondents may have been presented with much more detailed case studies than the reporting gives credit for, but in any event, there are basic things you would need to know, like how much income you need to draw in that retirement, and the complexity of other requirements in order to come up with a fee that was fair value.
If we are including fund costs in the above figures (maybe we aren’t, given £500 for retirement income planning seems ludicrously cheap), then whether an active solution is more suitable for the client than a passive one will have a huge impact on how much they end up paying.
Presumably advisers are doing different things for that money too, even though they fall within the same general client scenario. Does one do cashflow and the other not? Does one do inheritance tax and the other not? Will one give advice on long term care? Will the other offer more frequent reviews or meetings? Would it not be better to compare charges by individual services offered given this will inevitably be the case in the real world of advice?
I could raise another few issues. The study doesn’t seem to be sure whether the advisers that took it are independent. It references Pension Wise and the Money Advice Service, when, strictly speaking, these have now subsumed into the Money and Pension Service, and asserts that commission increases the cost of an investment, without noting that this can be – and in many cases is – rebated by advisers to their clients.
But I don’t want to detract from the key message here: all the case studies look at isolated events, not holistic financial planning. That can’t be done for £500. We need better research on exactly what can be, and exactly what services the client should expect when they pay a bit extra.