What is a fair fee for financial advice?
Should the sum depend on how long you spend with a professional? Or on how much money you have? Or how good the advice is?
According to Matthew Parden, managing director at Duncan Lawrie Private Bank, providers subscribe to two main schools of thought on fees: a set sum for advice or a pick and mix selection of fees that depend on the sort of advice required.
Six months into the UK’s new regime of transparent pricing and it seems as though the industry has already chosen a winner.
In the FT’s 2013 survey of wealth managers, only a handful of providers offered to charge clients an hourly rate. Instead, most levied set fees, linked to the amount invested.
On the face of it, this may not seem all that different to the annual charges that many investors previously paid in investment management fees, part of which were then passed on as commission for advisers.
But Catherine Tillotson, managing partner of Scorpio Partnership, says that the introduction of advice-based fees, and the ban on commission, has led to a seismic shift in the UK wealth management market – even if it’s hard to see from the outside.
“The removal of commission means that clients can largely evaluate their charges on a like-for-like basis across business models,” she says. “In turn, this introduces direct competition between different kinds of provider: independent financial adviser, private bank, wealth manager.”
Michael Morley, chief executive of Coutts, is not so sure. He thinks providers have come to market with different models and definitions of advice, which can be confusing for individuals.
Coutts charges an ongoing advice fee, rather than one-off charges, and insists that customers are happy with the system, so long as it is clearly explained.
At London & Capital, another annual fee charger, the firm explains its fees by telling clients that they are buying investment strategies, not just individual financial products. “Effective active investment management requires continuous review and monitoring,” says Iain Tait, head of private clients. “Monitoring which can only realistically be provided on a flat fee arrangement.”
Clients expect to build a relationship over a number of years, and so ongoing advice is expected, and an ongoing charge for it, says Stuart Cummins, managing director of Barclays Wealth and Investment Management.
“Our bankers talked clients through the industry change and how it would alter the way in which they pay for advice,” he says. “During this education process, some clients want detailed explanations of the changes and take the opportunity to review their plans and approach to advice, while others simply want clarity about the impact on them.”
St James’s Place, which is adamant that it has always been transparent on the fees it charged to clients, points out that just because wealth managers need to agree their fees with clients does not mean that all charges will be explicit.
“The challenge for consumers is that many advisers talk about their own fees in isolation and do not include the annual management charge or the charges made by a platform,” says the company. “The key question consumers should be asking is ‘what is the total cost of advice and investing?’, not ‘what is the advice fee?’”
Perhaps it is still too early to tell what the total costs will be. Barclays is just one of the providers questioned which says that it expects to refine and adapt its advice proposition as it gets more feedback from clients.
Many wealth managers entered 2013 with an open mind about fees, reports Tillotson at Scorpio, which means there might be re-evaluations on the way as they assess the competition.
”Bear in mind, there is no historical precedent or case study that wealth managers can turn to to see what might happen,” she adds.
“We are in a situation where they literally have to experience this change and experiment with charging structures until the right formula emerges.”