People who pay for financial advice often do so in a fog. They don’t fully understand what they are paying for and how they should pay for it. This shouldn’t be surprising – a lack of expertise is why people seek guidance. But at a time when consumers are looking to cut costs, how can financial planners and wealth managers show they offer real value for money?
How to value a service or product is usually guided by what has come before. Until 31 December 2012, the date that the Retail Distribution Review (RDR) came into force, it may have appeared to consumers that the ‘financial advice’ part of a service (if they took out products) was free – but of course it never was; fees were blended with other charges or paid in commission by product providers. Nevertheless, the tone was set: the cost of advice is regularly viewed as arbitrary.
What they charge
Accountants can do much of the work for a fixed fee per year, say to prepare a tax return for a small business (around £200 to £300) and bookkeeping. Both the Institute of Chartered Accountants in England and Wales and the Association of Chartered Certified Accountants offer search facilities to find a local reputable member. Some accountants may charge per hour for specific advice (usually from £50 to £100 per hour), especially advice on tax and investments.
The cost of advice from lawyers varies significantly, according to Legal Ombudsman, which has produced a guide on cost-related questions for lawyers. From fixed fees to hourly rates, from contingency fees to disbursements, the ways and how much you can pay are myriad, but customers can ask for a cap to be put on overall fees. Set fees for set tasks, such as writing a will, are popular, but customers should expect to pay £100 to £200 per hour upwards for advice.
Wealth managers usually charge fees as a percentage of overall assets managed, with upfront fees ranging from 1% to 5% and annual charges of around 1% to 2% (usually with a minimum of £1,000 per year). Extra charges, which include share trades and investing and taking out money, can also add up.
If not used as part of an overall wealth management strategy, financial planning fees are often for specific tasks. For example, according to Unbiased, an initial financial review may cost £500 on average, converting a £100,000 pension fund into a lump sum and annuity costs £1,750, and specialist advice on defined benefit transfer costs £1,500. Meanwhile, Moneywise has found that the typical independent financial adviser charges £175 an hour for their service, and offers a range that includes a £300 charge to set up a £10,000 investment ISA to a £3,000 fee to set up an income drawdown scheme on a £300,000 pension. However, the FCA notes that most planners and advisers charge on a percentage or ad valorem basis.
Since 31 December 2012, investors have had to agree fees with their adviser upfront. It was hoped by the authorities and regulators that the RDR would dampen confusion (and apathy) over fees. The RDR sought to introduce more fairness into the financial services sector for consumers, to raise professional standards and to introduce greater clarity. The principal change was that financial intermediaries were no longer allowed to be paid commissions by fund companies for recommending or selling their products.
But while some transparency and consistency has been ushered in, the national dialogue around advice and financial products is still driven by confusion. Almost two-thirds of people do not understand the key features of pensions, according to a 2016 survey
by insurance and financial services firm Wesleyan. People clearly still need advice. It is up to individual advisers to enhance the conversation by showing where they add value – often through their relationship skills and how they can put jittery minds at ease.
“The strength of the relationship is the key area where you can set yourself apart,” says Barry Horner, CEO of Bristol-based financial planning firm Paradigm Norton. “What clients want is to be able to sleep at night, which is why we spend most of our time with them finding out what they want to achieve. The financial aspects of what we do only makes up a very small part of our talks; we want to know about what matters to them.”
Charging for advice
The basis of charges for financial advice in the UK differs, but the main ones include: time-based fees, fixed fees and percentage-based fees. A report
released by the FCA in October 2016 analyses data in the retail intermediary sector submitted by 9,300 firms. Its breakdown reveals: 47.6% in the sample charging by percentage, 22.1% by fixed fee, 19.8% charging by the hour and 10.4% by a combination of these. The report further suggests that clients pay in one of two ways: facilitated payments, whereby cash payments are deducted from the clients’ investment portfolios by the provider or platform and paid across to the adviser, which accounted for 81% of initial charges and 74% of ongoing charges; and direct payments to the adviser, which accounted for 19% and 26%, respectively.
Percentage-based fees are often used to cover all of a client’s financial needs. Many wealth managers and financial planners charge an upfront fee based on a percentage of how much is invested, and then an ongoing yearly percentage-based fee for their continued management. For example, Brewin Dolphin
, which provides an ‘integrated wealth management’ service, that combines investment management and financial planning, charges a set-up fee of up to 2% (depending on portfolio value), with a combined annual fee of 1.5% for both financial planning and investment management – or 1.3% for those who only use the investment management service.
The advantage for advisers is that these fees are easy to calculate and they are transparent for the adviser and the client (while wealth managers that fall under the Markets in Financial Instruments Directive [MiFID] must now show what they are charging in monetary terms, they also display the percentage calculation, and the fees are still charged in percentage terms). A criticism of this model may be levelled at financial planners or wealth managers by those who have larger portfolios – they pay more in fees simply by having a bigger portfolio. This is often countered by tiered fees, where the percentage tapers off above a certain limit. Hargreaves Lansdown charges 2% of the first £200,000 invested for complex financial planning, which declines to 1% between £200,000 and £1m and there is no charge on the balance over £1m.
A fixed fee is a set fee for a specific piece of work and prices range from hundreds to thousands of pounds. A 2015 report
by Unbiased, a technology platform that connects consumers to financial and legal advisers, finds that an initial financial review may cost £500 on average, while a client seeking full advice for a £200,000 pension pot might typically be charged £3,000. But again, these figures can vary dramatically from firm to firm. “There is also typically a regional variation in fees for similar work,” says Michael Owen, director of financial planning for Brooks Macdonald. “And independent advisers have a much greater responsibility and range of solutions to consider than a restricted adviser is likely to have.”
"Having an open dialogue with clients, and giving them choice, means they will always be happy to pay for great service"
Fixed fees are easy to explain to clients who are accustomed to paying this way for other goods and services and, again, make financial planners and wealth managers look transparent. But because an adviser will be compensated the same whether the same task for each client is complex or not, they could be viewed as purveyors of an ‘assembly line’ service where it makes financial sense to spend as little time as possible on a project. However, “a good adviser will be able to demonstrate their experience, the value they can add, the service the client can expect to receive and thus allow the prospective client to assess the relative value of that service for the fees they will pay,” says Michael.
Time-based fees are charged per hour. According to the government-backed Money Advice Service, the UK average is around £150 an hour, but this may vary depending on location (see Figure 1). The size of the eventual fee can also differ significantly due to varying degrees of complexity.
These types of fees may make it simpler for a company to manage internal costs. However, having different fee levels for different grades of staff expertise has both advantages and disadvantages – consumers believe they are getting value if tasks can be carried out by team members on a lower rate, but they may also suspect that higher charged support may not be performed by the expert assigned to the service. Another downside lies in the time it takes individuals to perform certain tasks. One adviser may take longer than another to complete a task , which could result in the client paying a higher fee for the same advice. For this reason, a number of firms have been forced to cap charges.
Figure 1: Average adviser hourly rate charges. Image courtesy of the FCA
Note: This image was taken from the October 2016 Data Bulletin. Source: RMAR Section K returns for 2015
A future driven by relationships and choice?
The value of advice given should never be viewed solely in monetary terms: what savings can be made, growth can be achieved or what taxes or penalties can be mitigated. The relationship management aspect of the service is pivotal in assuaging the fears of those who have little knowledge about a complex and rapidly changing sector.
That said, how to charge for services and remain profitable will remain at the heart of the financial planner and wealth manager mindset, but clients seeking greater clarity may not be able to compare like-for-like so easily. “Fees should be entirely transparent, but the planned introduction of MiFID II suggests that it’s not a level playing field yet,” adds Michael. “Different advisers are likely to tackle the same problem in different ways even if the outcome is not terribly different for a client and this is bound to lead to different costs.”
Proposed MiFID II changes will create an increasing burden on advisers and providers, especially in the areas of compliance and what are known as best execution requirements. In this case, whereas under MiFID I firms had to take ‘all reasonable steps’ to achieve the best possible results for clients, under MiFID II they must take ‘all sufficient steps’. So the bar will be raised again for client focus. This will mean stricter rules on inducements, broader remuneration requirements and changes to the way research is paid for, among many others. However, all firms will not be affected equally and this could further muddy the charging landscape.
Practitioners shouldn’t feel restricted when deciding which fee structures to apply and they should be adaptable to client preferences, believes Barry Horner. “There is no one size fits all approach,” he says. “Whichever way you charge generally has advantages and disadvantages – there are flaws in every model. The most important thing is client focus. We find that having an open dialogue with clients, and giving them choice, means they will always be happy to pay for great service.”