Some of my favourite conversations about advice start – as all good conversations do – down the pub. During a particularly scintillating evening of bar-based banter a few months ago, a lawyer friend asked me how you guys, my readers, were reacting to Mifid II.
I explained the key thing was that advisers would have to review clients’ plans and reaffirm them as suitable on an annual basis. “Hang on. Didn’t advisers have to do that already?” came the reply.
I hope you can see why that is not a ridiculous question. After all, advisers charge ongoing fees. ‘Is that for ongoing management of my portfolio?’ Well, strictly speaking, no; that’s separate. ‘What about this thing I’ve heard about called a platform?’ Sorry, that comes out somewhere else too.
No fee model is perfect – that’s bleeding obvious. But consumer impressions of what you get for your ongoing fee – and how percentage-based charging works generally – can’t have been helped by defined benefit transfer scandals either, where dodgy advisers were revealed to have been taking a huge cut for continually managing the money as well as executing the transfer.
Yet the stats don’t show any real move away from asset-linked charges to fixed or hourly ones for ongoing advice. There are good reasons for this. It tends to overcomplicate things for the client, particularly for modular offerings, where clients can pick and choose the items they pay for from a menu of ongoing services. How does this marry with the new world of holistic planning? Does it take us a step back towards the transactional world?
But that doesn’t mean we don’t have to tackle this debate head on. A client can feel justly aggrieved that they are paying the same as someone else but for a much lighter-touch service. It feels fair to say clients should be able to decide what they pay for. Unless strong tiering of ongoing charges is applied, cross-subsidy on percentage charging does mean advisers are commercially drawn to only the largest clients.
More importantly, I can’t escape the idea that, on an ad valorem model, what you earn as an adviser falls as your client decumulates – a conflict of interest whether that’s the right strategy or not.
No fee model is perfect, but I’m glad the discussion has made its way to the pub.
Justin Cash is editor of Money Marketing
Follow him on Twitter @Justin_Cash_1