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.

Retail Distribution Review (RDR): Why financial planning is so important?

Recently the institute of financial planning promoted financial planning week, there were some excellent blogs which came out of this. One of these blogs came up with three steps to financial heaven:

•  Define it
• Cost it
• Fund it

Often especially when we are doing our investments ourselves we go straight to fund it i.e. we go straight to the solution without defining what it is being used for. So for example, we might buy a pension product because we think it will provide for us in retirement but actually we haven’t defined what we need and the cost to provide it. If you don’t know these fundamental elements then how do you know you have funded it? I believe this is why many people are disappointed when they come to retirement. 

I am very much in favour of having goals, if we look at the main goal of retirement then before we jump to funding it we need to define what we want, what will it look like?

Below are some questions you might want to ask yourself before you look to fund your retirement:

1. When are you looking to retire? Be realistic in your expectations
2.  Will it happen as a single major life change or a gradual transition? So you might decide at 60 you want to slow down but don’t want to stop fully working
3. If you are looking at a gradual transition is this going to be with your job, or will it be a new job or even a new business
4. Where will you live? If you live in say London with a house worth £600,000, will you move out of London? Will you downsize? Will you move to an area where house prices are cheaper?
5. What are you planning to do? What are your plans for retirement; some people have plans to travel, to go on holidays, to spend time with grandchildren or children.
6. Who will you do it with? Are you married, divorced, have a partner, are there dependent children or other dependents
7. How much will it cost? This is a difficult one to consider but assuming the mortgage is paid down, how much money do you need to fund what you want to do. This could be a monthly income and emergency savings
8. Considering risk – this is very difficult but this is crucially important:

a.       How much risk are you prepared to take to achieve your goals?

b.      How much risk do you need to take to have a reasonable chance of achieving sufficient growth to achieve your goals?

c.       How much risk can you afford to take?

The last question is possible the hardest and will depend on timescales to retirement, and the plans you have. One fund manager said to me that his strategy is a get rich slowly strategy. This is worth considering because often we want to make money quickly but actually a carefully planned strategy can deliver better results with less risk.

The point which the person who highlighted these in his article was making was that financial planning 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. In many cases I would argue that it is.

(Parts of this blog are adapted  from an article and blog written by Alan Dick, Managing Director of Glasgow-based Forty Two Wealth Management and vice president of the IFP)

Good news for pensioners – pension drawdown

Buried in the depths of the autumn statement was a small note stating that pension drawdown limits were changing from 100% to 120%. This effectively means a 20% increase in income for those who have suffered from a change in the rates and gilts and this is good news for many.

To explain:

For a male aged 65 the 2006 tables would have given him an income of £57 per £1000 of pension fund and then this would be increased by 120%. So on £250,000 the income would be assuming a gilt rate of 2.25%:

(£250,000 / £1000 x 57) x 120% = £17,100

The new rules changed the rate to £55 and set the increase to 100%. So using same assumptions the income would be:

(£250,000 / £1000 x 55) x 100% = £13,750

A drop of over 19%. In reality the drop was higher for many because gilt rates had fallen from over 4% to 2.25%.

The changes announced in the budget mean that we can now use 120% in the calculation which brings the income to £16,500 which is great news for many.

But the real winners are females and the EU gender rules.

The EU gender rules mean that for a short period females will use male rates. This means that where they were using £51 per £1,000 they go up to £55 per £1,000 meaning their current income goes from £12,750 to £16,500 (an increase of 30%). Effectively using the 2006 tables this would be equivalent to a 3% yield.

In summary some will argue this is not enough and perhaps the tables need to be reviewed but this is a big opportunity especially for females to increase their income to a more acceptable level. The other important aspect is that this was driven by a campaign where journalists, individuals and industry specialists came together to make it happen.

What is RDR – the dangers of undervaluing advice…

There is so much noise about RDR that sometimes we lose sight of what advice is all about.

We have moved to a society where actually we want to do everything ourselves, and often in doing this we focus more on money than the outcome. Let me give you an example.

We drive an 11 year old car, it is in fairly good order and we regularly service it but we were worried that if the car suddenly broke down we would be landed with a large bill that could be more than the value of the car. So we purchased warranty protection from a company called Go Car Warranty. The warranty looked okay, it would pay £500 towards the cost of a serious mechanical failure. So we agreed to pay for three years cover in advance for a very good discount.

Looking at all the other warranties this was by far the cheapest. For the last 18 months we have had peace of mind that we were covered. Then our worst nightmare happened, the car suddenly broke down. To cut a long story short when it came to get them to pay they turned round and said no. Apparently although the parts are not fully worn it is classed as wear and tear.

The problem with things like car warranties is that there isn’t anywhere you can go for advice so you therefore focus on cost and if the terms and conditions look okay you sign up.

This made me think about advice and the danger of undervaluing advice.

I have read that up to 5 million will have no access to advice. If we take my scenario, say 50% of those people decide they need to do something and make provision for retirement then what will they do?

Potentially we are told that the power of the internet has enabled us to make our own decisions. So we want a pension and we Google pension and hey presto we get a company coming up on the first page. We might not look at cost and in fact it might appear to be free. So we go for that, then we realise we need to invest the money so we pick from the most popular funds.

And that’s it, job done……

The problem is that if we don’t do anything when we come to benefit from the plan we are likely to be disappointed.

We could argue that actually people who do it themselves are savvy investors with lots of money but below are some stats:

• 1 in 3 SIPP (pension) investors do nothing once they have set up the plan    
•  Recent articles have indicated that many people do nothing to review the amount they are investing – consider paying £50 per month for 20 years this will deliver a disappointing income
•  The average investor in one of the largest DIY investor platforms has £40,000 across all investments (pension, ISA etc)

Consider the following stats from unbiased.co.uk:

• 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

Going back to my car warranty I cannot turn to anyone for advice and actually because of that I am worse off. I know nothing about cars or car warranties so if I could find someone to advise me then the value of paying someone to deliver the right solution would be invaluable. This is the same for advice.

I believe that people can do it themselves, and we should encourage more people to do this; the key is understanding the concept of building financial plans and building solutions to deliver on those goals. But there are many people who don’t know how to do it, and won’t be able to do it, or don’t have the time to do it and therefore need to seek advice.

We can focus on the costs of the advice but actually we should be focusing on the service that you will receive. If you understand the service you will receive and you work closely with your financial planner then that advice can be worth a considerable amount more than what you pay for it.