Is a 1% ongoing fee viable in a no-trail RDR world
How do you justify a 1% ongoing fee and keep your clients in a no trail RDR world? Richard Leeson, director of D&W Management Consulting, considers the challenge
When platform rebates were put out to pasture in the Financial Conduct Authority review of platforms published in May 2013 many feared the same fate would befall trail commission. The FCA was quick to provide reassurance that it had no plans to ban trail but, and this was overlooked by many, that was because it fully expects trail to disappear naturally.
The expectation is that adviser charging will replace trail over the next few years as advisers meet clients and provide ongoing advice that falls under the adviser charging regime. FCA head of investment policy David Geale made this clear in his answers to questions on trail.
Assuming that advisers do indeed continue to provide their clients with advice then they will need to tackle the issue of converting their remuneration from trail to fees. In doing so the level of fees will become more apparent to the client and psychologically this presents a significant shift in the client relationship.
Hit the trail
There is a world of difference between 0.5% to 1% in the mind of a client and the actual pound notes value that this represents. For example, a client with a portfolio of £500,000 being charged 1% may be content but when the same charge is expressed as £5,000 per annum a different reaction might be expected.
When charges are expressed in pounds and pence it encourages us (clients included) to look at relative cost; we compare the fee to other expenses we incur. An annual fee of £5,000 is higher than the gas bill, electricity bill, council tax bill, and pretty much every other bill except that paid to HMRC for such clients. With increasing adoption of platforms the clarity with which clients will be presented with annual advice charges will increase.
On being made aware of the costs of advice, a client might compare the charge to other professionals. A solicitor might charge me £150 per hour for legal work or an accountant a similar sum for submitting my tax return. Faced with a bill of £5,000 per annum from my adviser will make me query the work on my finances by my adviser when they equal 33 hours of billing time a year.
There are choices that advisers will need to make. One rather unpalatable option is to reduce fee levels in line with client pressure. To avoid this advisers will need to be able to demonstrate real added value in their proposition. Many are wedded to the notion of service excellence as the cornerstone of their proposition but with an annual fee of £5,000 that service will need to stand up to scrutiny. (For that sum of money a client could employ a tax barrister for five hours a year – will they believe their adviser has added that same level of value?)
The proposition clearly needs to extend beyond service; failing to do so invites uncomfortable comparisons. Advisers add significant value to the client relationship but that does not mean they are always the best judges of what their clients value. As Abbie Tanner of A Business Innovation puts it: “The only way to genuinely understand what your clients truly value is to ask them.” She recommends setting up a client advisory panel of your top clients to gather their feedback on your offering, charging structure and ongoing service, adding: “Advisers are quite often surprised by the insight this can provide – especially if they have spent many years focusing on the wrong value messaging in their marketing.”
The real RDR test is yet to come for most advisers. Existing clients will be more easily persuaded, assuming they have enjoyed a long and fruitful adviser relationship. It would be wise to engage with them to help define the advice proposition. New clients are likely to be more sceptical and require a clearly articulated proposition.