By Garry McLuckie, Marketing Director at Alliance Trust Savings
Whilst there are some key issues still outstanding that need to be clarified there are also key elements affecting adviser business models that we know with certainty will be required come the end of the year.
One of these and indeed one of the central pillars of RDR is the desire to ensure that ‘consumers are offered a transparent and fair charging structure for the advice they receive.’ Intentionally or otherwise, our industry has created a situation over the last 30 years where charges are completely opaque leaving the end consumer with very little real understanding of the true cost of their investment.
The provision of effective financial advice requires the collaboration of a number of key parties, each of which will need to be clearly identified during the sales process along with their explicit charge. Typically this will be the provision of:
- Advice (and whether this is independent or restricted)
- Product wrapper
- Platform administration
- Fund / investment administration
Clearly what advisers choose to charge for advice is entirely at their discretion.
How much clients are charged for the remaining services varies and platform charging models will have to become far more transparent over the course of the year to allow an easier comparison.
And this is where time spent properly researching different pricing propositions really can add serious value to client funds.
For fee based advisers now and post RDR, there are/will be three key components to consider when reviewing product or platform charges:
1. Fund Manager Rebates
Platform and provider business models, in the main, continue to rely heavily on fund rebates. The FSA has yet to make a final decision on this though we suspect a ban is likely with many platforms replacing this revenue stream with an ad valorem fee. A small number of platforms have started to rebate a little of the fund manager commissions directly back to the client. A couple, such as Alliance Trust Savings rebate all commissions in full back to the client.
Platforms that have been retaining all or the majority of rebates received will require a more fundamental overhaul of their proposition from a charging perspective. As ATS is not dependent on rebates as a source of revenue there is little if any platform changes to make, we are in effect RDR Ready.
2. Flat rate fees
A second important consideration in terms of pricing is the growth of flat rate charges. It costs broadly the same to administer an ISA portfolio of £50,000 as it does a £250,000 portfolio yet the majority of wrapper pricing structures apply an ad valorem fee. Typically a wrapper administration fee of 0.5% of the value of the underlying investment is not uncommon. If it costs broadly the same to administer then why should ad valorem apply at all? For wealthier clients the costs can really start to mount up. We believe this is nothing more than a tax on wealth.
3. Transactional charges
The third element that comes hand in hand with the two types of charges above is transactional based charging. Platforms or providers that don’t rebate commissions or who impose ad valorem fees may well be in a position to pass off some transactions as being ‘free’, the most obvious that comes to mind is switching.
Paying on a transactional basis shouldn’t be seen as a negative though.
0.5% on a £75,000 fund is £375 with ‘free’ switching.
Pay a fixed fee of £135 plus say, 4 switches (8 transactions at £12.50) is £235.
Depending on the value of the investment and regularity of switching, flat rate, transactional based charging can still drive real value to your client’s bottom line.
So how important is pricing really?
It’s clearly an important issue but as with everything in life, we need to balance quality with value for money so absolute cost may not be the be all and end all, however, if you can potentially save your client thousands of pounds over the lifetime of their investment, I rather suspect that that’s a conversation worth having.
This document is for investment professionals only and must not be distributed to, or relied upon by, private investors. The views expressed are those of the individual based on current circumstances and are subject to change. The value of investments and income can fall as well as rise as a result of market and currency fluctuations. Investors may not get back the full amount invested.