The FCA’s Data Bulletin is increasingly hotly anticipated and yesterday’s release shared some fascinating insights on adviser charging, sources of revenue and revenue per adviser. The data show that the average minimum initial advice charge is 1.2% and average maximum is 3.2% .The average minimum ongoing advice charge is 0.5% and average maximum is 1.0% .
We think that the days of advisers being able to charge 3% up front are numbered and fees at this level are starting to look out of step with the rest of the market. Our conversations with advisers suggest that most charge 1% rather than 3% up front, with a view to achieving a total cost of investing to the client of 2% (at the maximum). Our quant tells us that the data are skewed to the right by a relatively small number who charge well about the average and they look particularly vulnerable.
Interestingly we do see evidence that advisers are adapting charging structures. Some advisers we speak to are extremely critical of ad valorem charging, expressing concern that clients with larger portfolios subsidise the service provided to clients with smaller pots. The counter argument is that clients with larger portfolios might get more of their adviser’s attention and are therefore paying for a higher level of service.
Fixed fees appear to be gaining traction among advisers with a high proportion of clients in decumulation. If advisers are charging clients drawing down assets on a percentage basis; as those assets decrease, so does the adviser’s fee. Equally work on DB to DC transfers, advisers tell us, is typically charged on a fixed fee basis with £6,500 appearing to be a typical fee level.
We are not seeing any evidence that advice fees will move lower than 1% for initial face to face advice. But advisers are conscious of the impact of charges on client returns. A number are seeking to bring down the total cost of investing to the client and this puts platform charges in the spotlight.
Platform charges under pressure
Our latest Adviser Platform Guide – out this morning – shows that low charges have overtaken investment choice and service as advisers’ top ‘must’ of the perfect platform. Indeed, one appointed representative of a network that I spoke to this week told me that when it comes to picking a platform from the network’s panel for his clients, the only thing his compliance team really cares about is low charges.
Charging models for adviser platforms remain almost entirely ad valorem and are levied on a tiered or cliff-edge basis – i.e. with the charging percentage reducing for larger portfolios. Alliance Trust Savings is the only renegade, bringing across its flat fee structure from the D2C world. Aegon’s charge cap at £250,000 creates a similar effect, meaning big savings for portfolios above the £500,000 mark.
This charging approach could lead to more competition between platforms for large portfolios. Most advisers that we speak to are loathe to transfer assets from one platform to another unless absolutely necessary. However it is hard to ignore the savings that could be made for higher net worth clients. One adviser told us that he was fully prepared to transfer clients once their portfolios reached a certain size, citing a recent example where he moved a client from a bespoke DFM portfolio onto Alliance Trust Savings, saving the client £11,000 in charges.
Adviser price sensitivity is mirrored by investor sensitivity
Adviser price sensitivity aligns with heightened price sensitivity among end-investors, a trend that we observed in our last round of consumer research. ‘A competitive price’ became the top factor when choosing an investment platform. That data relates to active private investors – both advised and self-directed.
We are seeing the lower-cost D2C propositions growing more quickly than the rest of the market – a trend that Vanguard expects to capitalise on with its new digital service.
What about value?
Low charges are important but when we ask advisers to rate platforms on value for money, Transact is among the top scorers. If platforms have tip top service then they may be able to justify maintaining rather than reducing fees. We see services in both the advised and self-directed spaces bucking the trend with strong growth and what could be considered to be premium pricing – Standard Life and Hargreaves Lansdown in particular. But only a few platforms are in a position to pursue this strategy successfully.
Sensitivity to charges, whether adviser or investor sensitivity, is a theme much trumpeted by the press but we haven’t seen this sentiment translating into action on the ground. Advisers look to be in a better position to defend their charges by placing pressure on other parts of the value chain. So we may just be at a tipping point for platforms.