At the moment I feel a little bit like a battleship
from the game battleships. The pressure is to avoid direct hits on your ships
but the more that is fired at you the more you are likely to be hit and
eventually sink.
With the retail distribution review taking full stage, journalists
smell a story and unfortunately the stories do not favour financial planners.
It makes me feel that financial planners are like the battleships under
constant fire and slowly being chipped away. The problem at the moment is that
really they are not getting the same traction back in the press.
When you read my blogs I admit I sit on the fence when it comes to
going direct, or going to a financial planner. The reason is that I have
developed a direct proposition only to discover you need deep pockets for it to
work and I currently work for a financial planner where I can see the benefits
of receiving financial advice.
The latest broadside by the press was an article in “This is Money”.
The article uses research by AXA Wealth indicating that 54% of individuals who
currently use a financial adviser said they only rely on them for more complex
investments. This is a springboard for the journalist to assume there will be a
massive rush towards DIY investors.
The reporter then makes the assumption that because the relationship
between product provider and financial planner is changing to a relationship
between client and financial planner this would see a massive increase in fees.
I would like to dispel this myth. Many financial planners have a fee
structure in place – this could be an hourly rate, a monthly retainer, percentage
of investments managed or a combination of these options. It could be that some
might set a minimum for the work they do.
How the fees are paid depends, this could be as a direct payment i.e.
by cheque (or card) which is likely to be subject to VAT, or as a payment out
of the amount being invested.
So for example, if a client currently has £100,000 managed by a
financial planner the current “commission” might be 1% a year, so £1,000 p.a.
The financial planner and client may agree that going forward the fee is 1% a
year. Furthermore they may agree that the fee is taken from the investments. So
clearly the fees are not going to rocket…….
The problem which perhaps the Mail has not articulated very well is
that there is a tipping point where actually the amount of work needed to manage
and advise on an investment means that it is not worth doing. So for example,
if a 1% fee is agreed on £25,000 the work involved would not make it worthwhile
unless there was other investments connected with it – so the example an
employer, or perhaps family and friends.
It could be that financial planners start to turn away clients with
less than £40,000 to invest because they cannot financially make this work
unless the client is prepared to pay a minimum fee which is unlikely. Or they
may look to develop a simple packaged solution.
The article is however the first article to expose the faults of the
direct propositions – most are funded by hidden charges. Some taking up to 1%
rebates from fund houses. Currently the direct providers do not need to
disclose these fees and many investors think that like they were getting
financial advice for free they are getting their direct investments for free.
Hence the horror when Interactive Investor started charging. AXA Wealth perhaps
provides an indication where the likes of Hargreaves may go with a percentage
charge of the money invested and possible a service charge. How investors
respond to this, well we will have to wait and see.
The point of this blog is simple fees are unlikely to go up for people
seeking advice however what might change is that it becomes harder to find
advice where you have smaller sums to invest. Therefore direct operations do
have the ability to provide a service and solution to these clients but what
comes with this is a responsibility not to sell just products and investments
but also provide true financial education so that investors can make proper
informed investment decisions, and provide a clear charging structure.
This is the message all parties both direct and advised should be
getting out there.
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