In the last few weeks I have seen
a few blogs. A couple by Ian Cowie of the Daily Telegraph have concerned me.
The problem is that what he prints is not untrue but it paints a much distorted
picture. I could say I bought a car with four wheels and it was a con. This
could be true but there is a lot missing from the story before any decision can
be made.
His latest article states that
most IFAs rely on commission paid to them by the insurers and fund managers
rather than charging the clients a fee. He then goes onto to compound this by
using the example of hidden charges on unit trusts and OEICs. He points out the
transparency of other forms of investment but to be fair you don’t get to the
bottom of the article because the damage is done. This is the same journalist
who claimed that IFAs who do nothing will continue to take in their commission.
None of this is untrue but it is
clearly half-truths and an easy way to draw in the public to hate commission
hungry sales people.
Let me explain where I think his
thinking comes from. Over ten years ago I worked for a couple of insurance
providers. I saw two cases which made me feel really uncomfortable. The first
was a financial adviser setting up a group personal pension scheme where he was
set to receive £100,000 plus up front and around £100,000 a year. The second
was a financial adviser who transferred a client out of the British Airways
Pension Scheme who took £35,000 in commission and a further £35,000 from the
two unit trusts the money was invested in.
To some extent that painted my
view of financial advisers and this was compounded by what I read in the
papers.
In reality this was over ten
years ago and what journalists like Ian Cowie seem to have missed is that in
the last ten years (and possible more) a lot has changed. In the last four
years I have done a lot of research into this market and below are two key
observations:
Financial Advisers
Many financial advisers, or
financial planners as I prefer to call them, have moved across to a fee structure.
This structure can differ from financial planner to financial planner but it
can be a retainer fee of say £30 per month and possible a percentage fee for
managing assets, it can be a percentage fee for managing assets or it can be an
hourly fee.
For many financial planners who
have moved across to this way of managing their clients they use what is called
a wrap platform (a point Ian Cowie seems to have missed). This is in many cases
the most transparent way to manage client money. For a fully transparent
platform they ensure any rebates from fund managers come back to the clients.
So effectively taking Ian’s example a fund charging 1.50% may have a rebate of
0.75% which comes back to the clients cash account.
There are arguments as to how
this should be used and the FSA argue that this is incorrectly being used to
cover fees. I would argue against that because once you move down this route
then actually everything is transparent and the clients in many cases are happy
for this to cover the cost of the advice.
And remember ultimately the
platform is the end solution; the financial planner will have worked from what
the goals are and then delivered the solution at the end.
I will cover costs at the end
because this again is a flaw in Ian Cowie’s argument.
DIY Investors
Ian Cowie talks a lot about ‘free
financial advice’. I notice one of the comments from janetjH on his blog about “the
good thing about managing your own affairs is that you are not paying hidden
charges to people who couldn’t care less about your future”.
Let’s stop; this sounds like ‘free
non-financial advice’. I go to a “free” platform. There is no upfront charge
for buying funds and in some cases I may even get a slight discount on the
fund. Say a 1.5% fund is charged at 1.35%. So I am getting 0.15%. So actually I
feel like I am getting something for free.
Let’s go back to what Ian Cowie
is saying, many OEICs / Unit Trusts pay rebates. If you go direct who get
these? How do the direct platforms make their money?
Before I answer this consider
iii.co.uk who recently said that they would move to a fixed quarterly charge of
£20 and pay any rebate back to the client cash account which could then be used
to fund the charge. There were cries of disgust that they were now charging for
the service but hang on they always were.
So going back to the question I
have heard some direct platforms are receiving up to 1% in rebates so even if
they give back the client 0.15% they are taking 0.75%. This doesn’t sound free
to me.
Direct platforms do not need to
change their practice until at least 2014. It also appears that if clients stay
in a rebate paying fund then the direct platform can continue to take those
healthy rebates.
This is something journalists
should be investigating.
Comparing costs
For nearly five years we have
adopted a fee structure of up to 1% of the assets managed. We may also charge
up to 1% for new money. All fees are agreed up front with the client.
I had a look at one of our
solutions and the maximum cost would be around 2.05% p.a. (so on £250,000 this
would be £5,125 p.a.). This covers the cost of the platform, the investment and
our fees. If we build in the additional expenses of the funds this will add a
further 0.19% or £475 p.a.
Now if I build the same portfolio
with a provider that has no rebates the charge on the same portfolio would be
around 1.50% p.a. (so on £250,000 this would be £3,750 p.a.). Again you need to
build on the additional expenses of £475 p.a.
So the difference in cost is
around £1,375. The question is what you get for this additional cost? For many
this is peace of mind, and this peace of mind of mind is delivered via the
service proposition. Financial planners look at the whole picture and not half
a picture as journalists tend to have a habit of doing.
Don’t get me wrong Ian Cowie has
done nothing wrong but he needs to be careful about painting half a picture and
actually consider how he can help the public as we move to these changes in
2013.
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