Despite being an absolute requirement of the Financial Conduct Authority, many advisers still aren’t telling their clients how much they’re going to charge them!
More Than One Third Of Advisers Don’t Clearly Disclose Their Charges
What Does Your Adviser Actually Charge You, And Is It Value For Money?
In 2013, the Financial Conduct Authority introduced its Retail Distribution Review. It required advisers to have a high level of qualification, and banned them from taking commission on financial products. It also required them to reveal the cost of advice in a clear and transparent manner, in line with its ‘treating customers fairly’ regime.
Two years on, in its latest review of the way financial advisers charge for services, the Financial Conduct Authority has discovered that more than one third of firms are still failing to disclose the total charges for on-going services they provide.
The Bigger The Sale, The Bigger The Commission
Behind the banning of commission was the principle that it rarely takes ten times more time and effort to advise a client on a £100,000 investment product, compared with advising them on an investment of £10,000 into the same investment product. Yet for decades, that’s exactly how advisers were paid. By way of commission as a percentage of the value of the investment.
To be fair, consumers liked commission. That’s because many of us baulk at paying fees, particularly if they run into four and five figures. Commission felt like you were getting advice for free. But as the commission was inevitably taken directly from the amount that when into your investment product, the cost of advice was far from free.
The regulator’s aim was to bring advisers in line with other professionals, such as accountants and solicitors. These groups typically charge on an hourly basis, reflecting the actual work being undertaken, rather than the value of the underlying investment.
Incredibly, In The Majority Of Cases, Nothing Has Changed
Whilst just under a quarter of advisers now regularly charge their clients on an hourly basis, the vast majority charge their fees based on a percentage of funds under management.
You don’t physically write out a cheque for your adviser’s fee as you might with a solicitor. Instead, you sign a form to enable your adviser to deduct its fee from your funds. Compared to commission, can you spot the difference?
Not surprisingly, the regulator isn’t happy. In a recent report, it’s concluded the wealth management sector is failing to properly disclose percentage charges.
The Regulator's Report: How Advisers Charge
Staggeringly, of the advisers it reviewed, the Financial Conduct Authority found that 73 per cent failed to provide the required information on the cost of advice. It said that hourly rates were charged by many firms for work done on an ad-hoc basis, with most charging a percentage of the funds invested for the main advice. It said:
In particular, we remain concerned that some firms are failing to provide individual clients with clear disclosure, in cash terms, of the on-going charges they will be paying for the firm’s on-going service. As on-going services are central to the services many firms offer their clients, it is important that firms disclose these charges clearly.
Where advisers charged by the hour, more than half of them, 57 per cent, did not disclose how long each service was likely to take, meaning that people had no idea how much their advice would cost.
23 per cent of advisers gave their clients a wide range of costs, stating they charged between £X and £Y for a financial planning report, making it difficult for people to understand how much they would pay.
When it came to on-going services, 35 per cent of firms did not reveal the total adviser charge in cash terms specific to the client, making it almost impossible to compare one firm’s charges with another.
The Cost Of Advice Has Risen Significantly Since The Retail Distribution Review
It’s estimated the total cost of the Retail Distribution Review to financial services firms will be £2.6 billion by 2017. This is against initial estimates of £470 million. As this cost is ultimately passed onto clients, and the regulator has largely discovered that not much has changed, it’s reasonable to conclude it’s largely been a huge waste of money.
Currently, those advisers who charge on-going services on a percentage of funds basis typically charge between 0.75 per cent and 1 per cent per year. Previously, product providers used to deduct trail commission of around 0.5 per cent per year. That’s represents an inflation-busting increase in costs.
There’s no doubt that well qualified advisers fulfil a valuable role in financial planning. But unless they treat their customers fairly when it comes to charging them for advice, they’re in for a rough ride. Not just at the hands of the displeased regulator, who at the present time has ruled out sanctions against firms that don’t fall in line. But also from their clients, who are bound to vote with their feet if they feel they aren’t being treated with respect.
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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