Retail Distribution Review (RDR): A question of fees

I recently had some comments on twitter around fees. The comments were justified:

“I wonder what percentage of people would say they can’t afford one, come January…..”

“Difference is customer didn’t actually see the charge. I think a lot will jump ship to execution only”

I have in a number of blogs commented on fees but for this final blog of the year I wanted to clarify adviser charging, and how this is different to commission.

In the past the relationship has firmly been product provider / adviser driven so commission was paid from the product provider to the adviser. Often, although disclosed in sales documents it was never really seen. It is important to note that this applies to both advised and execution only. So typically with a fund the fund charge would be say 1.5% and the adviser would get 0.5% of that fee, and for execution only well in some cases they receive up to 1%.

RDR effectively says this is wrong and that all fees should be disclosed and advisers have to adopt this new approach from 1 January 2013. The smaller execution only platforms have also moved to this approach however the larger execution only platforms are understandably holding out until they have to do something which is likely to be during 2014.

The misconception with adviser charging is how it will be charged. The fact is that there will be different models (many of these are already in place) – some examples include:

1. A percentage fee based on the assets managed – so this could be anything from 0.5% to 1% p.a.
2. A monetary hourly rate – so this could be anything from £100 per hour plus
3. A monthly retainer fee – I have seen these fees set at around £30 per month

Or, it could be a combination of these with perhaps minimums and maximums.

So, if I take our practice we have over the last four years run a fee based practice charging up to 1% p.a. Will this change from 1 January 2013, the answer is no.

The next question is how that fee is paid. In many cases the end solution we use is a platform and the fee is taken from the investments the client has. Again this will not change from 1 January 2013. Clients also have the option to pay by cheque if they want.

As it stands, the platform works as a tool to deliver solutions. It also enables the client to benefit from rebates from the fund managers. So when we create portfolios it is the client that benefits from any rebates from the fund managers. So for example for an ISA or personal investment the annual fee including the platform charge, the investments and our fee is around 1.7%. As it stands (before the rebate issue is agreed) a similar portfolio with an execution only platform which doesn’t fully rebate fees comes in around 1.4%. So the difference between the two is small.

Of course we wait to see what the FSA do on rebates because they want to ban all rebates and that means that execution only platforms will have to re-think their charges and advised platforms will have to re-think theirs.

But the point with an adviser is as per my last blog, it is not about the product or end solution it’s about a service which looks to achieve and maintain your desired standard of living.

So when we consider the fee we are paying perhaps we need to consider less about comparing against the end solution but against the service and decide whether this is worth the money we are paying. Consider these statistics which I used in a recent blog:

• Individuals who have an adviser tend to have more holistic solutions like life insurance, pension and investment products than non-advised individuals

• The current average pension pot for consumers who have been advised on their retirement planning is £74,554.30, nearly double that of those not seeking advice

• Those who have taken advice put nearly a third more a month into their pension plan

• On investments, people with an adviser save for longer and contribute more, leading to an average investment value which is over £40,000 higher than the average for those who haven’t sought advice

This is a point that is often missed and needs to be considered. Perhaps the question we can’t answer is that financial planners who have not adopted this approach in the past may need to draw a line in the sand where simply they cannot provide the same level of service below a certain threshold and then what do those people do. That is an unknown but it will play out in time.