This month’s blog is about the touchy subject of adviser fees. Anyone with an investment or pension, assuming they have an adviser, will generally be paying some sort of ongoing adviser fee. This is agreed every year, under new legislation, and took the place of commission, following the launch of the Retail Distribution Review (RDR) which started to be enforced in 2013. Prior to this it would not be unusual for customers to unwittingly pay up to 7% in commission to certain advisers and institutions. Instead, Customer Agreed Remuneration (CAR) replaced commission. This immediately saw the withdrawal of Bancassurers and Insurance Salesmen from the Pensions and Investments advice
arena, along with a lot of Independent Advisers. This, combined with more and more people seeking advice, may mean it is not beyond the possibility that when clients are looking for specialist advice it may not be available, as the limited number of remaining advisers have their own loyal and regular client base. In fact, the adviser community has been gradually falling from a peak of nearly 106,000 in 2006 to just under 22,000 now. It is also estimated that up to a third of those still active within the industry are planning to retire within the next three years. So, it is safe to assume that there will be a shortage of advisers soon. There is a combination of reasons for this reduction; from increased regulation and fees, to barriers to entry to new adviser. I would say the fees adviser firms have to pay is the largest concern though. A typical firm will have to pay the following every year: Financial Conduct Authority Fees, Professional Indemnity Insurance, Financial Services Compensation Scheme Levy, for a small firm such as us this is in excess of £17,000 per annum.
Another large factor is Claims Management Companies jumping on the band-wagon by instigating complaints. Now that the PPI market is coming to an end, these companies will need fresh meat to continue to function. Therefore, they will be actively trying to persuade people to complain about anything from Defined Benefits transfers to investment performance. The downside of this will be
higher fees for the remaining advisers and subsequently their clients. Then there are software/research packages, staff, premises and IT support. All in all, providing financial advice is an expensive business and unfortunately this must be passed on to the consumer. On the plus side, fund management charges and platform fees are going down. This is generally as a result of technology, but without a doubt the role of the adviser as an intermediary between the company and the adviser plays a massive part. Pension and investment companies generally don’t provide advice and would prefer not to deal directly with the client. Therefore, you will generally find that companies who specialise in providing products via IFA’s are lower in price. This counterbalances the increase in ongoing adviser fees, who now have more work to do. Since RDR the cost of initial advice has reduced due to the change in fee disclosure. So overall, especially in the early years, most clients are much better off under the changes. Those clients that don’t feel that they need an adviser or are not getting value for money, have options available. These vary from direct- to- consumer platforms and robo-advice. However, I believe the general public need to be careful regarding what they wish for. If no one wants to pay fees, then that will hasten the demise of the financial advice sector to a position whereby they will be in very short supply. Even then, those that do remain will have to pay out a lot more in associated fees. This just creates a knock-on effect, making advice more and more expensive.
The alternatives which is likely to emerge, such as Insurance Companies and Bancassurers re-entering the market are unlikely to benefit the client in my view. Lloyds have recently announced that they are to employ 700 new advisers, this comes just a few years after sacking 1,000 advisers due to the influence of targets affecting the quality of advice. I have attached an interesting article regarding a study of the benefits of financial advice.
https://www.telegraph.co.uk/money/smart-life-saving-for-the-future/benefits-of-using-financial-adviser/
Why would I want to pay adviser fees?
- The adviser providing additional services such as reassessing risk, checking fund suitability,
provider due diligence and whether your circumstances still suit the original advice?
- Are the correct death benefits nominations in place? Are any in place? Are you aware of the
implications if they aren’t?
- Most advisers will provide intergenerational advice, to ensure your assets end up with the
right beneficiaries.
- Are you likely to pay Inheritance Tax?
- Are you taking income in the most tax efficient way?
- Are you protected against adversity?
A good adviser will be checking all these regularly. I would like to hope that most advisers, including us, provide value for money and that the financial benefits far outweigh the costs. Only Time Will Tell.