Knowing the price of everything and the value of nothing
Tim Sargisson looks at the results of the FCA’s advice charging survey and explores why it seems small firms haven’t moved with the times.
Last month, I posed the question about what financial services could learn from the demise of BHS and Austin Reed.
My point was that once a business is no longer relevant in the eyes of its customer, it’s not a question of if, but when it goes under. BHS and Austin Reed lost their relevance and sadly no longer resonated with their customer base.
My point was that to survive and ultimately to succeed we have to better understand what our customers want.
We accept that today’s consumers are more demanding, but at the very least it’s reasonable for a customer to expect that a business understands what to charge.
Not just what to charge, but what it’s charging for and when to charge it.
In the light of this wry observation, the FCA’s recent survey of firms providing financial advice and focusing on advice charges makes for interesting reading.
For those of you who missed it, the FCA surveyed 233 firms providing advice on retail investments and bracketed advice firms into three groups:
• Large firms comprise firms with ten or more advisers
• Small firms comprise firms with up to nine advisers
• Very small firms are those with one or two advisers
Initial Fees
The median initial percentage charge is broadly similar across firms, irrespective of size. Large, small and very small firms charge 3% for investable assets up to £100,000. This then drops away as assets increase, falling to 1% for large firms, 1.2% for small firms and 1% for very small firms at £1m of investable assets.
There are some variations for retirement income investment advice which was broadly similar at 3% for pension pots up to £100,000, 2% for £250,000 pots, 1.5% for pots over £1m. The charges were similar across all firm size segments.
Charges For Advice
The major difference across firms is the amounts charged for ongoing advice.
Small firms charge a median of 0.5% for advice from less than £10,000 up to £1m while the pricing charged by large firms varies considerably more.
It ranges from 0.81% at £10,000 up to £250,000, before dropping to 0.75 % at £250,000 and then 0.5% for ongoing advice on £1m of investable assets.
So, while the FCA’s survey of firms providing financial advice is 40 pages long, perhaps its message can be summed up in a single sentence: Large firms’ ongoing advice charges outstrip smaller businesses.
Which begs the question ‘why?’
Without a detailed analysis, one can only speculate. However, I would argue, based on my experience of working with advisers that there are three distinct reasons for this:
• The small and very small firms haven’t undertaken sufficient analysis to fully understand how much it costs to operate their business. Post-Retail Distribution Review (RDR) they have simply continued with a 20th-century pricing structure handed down by product providers.
• Advisers feel uncomfortable explaining fees to clients and have continued with a traditional approach. This sidesteps the need to discuss charging a more realistic fee with the client.
• The small and very small firms don’t believe they have improved their proposition sufficiently post RDR and therefore don’t feel able to justify increasing fees. Even when it is supported by an increase in costs.
I may be wrong in my analysis and all feedback is gratefully received.
Suffice to say that as an industry it is critical to our future success and long-term growth to fully understand what it costs to run our businesses and to ensure we evolve to a value-based pricing model.
Published on 19th July 2016
