I had the pleasure of attending and presenting at the inaugural Next Wealth Live conference in London last week.
It was a really interesting day, geared around 'what next' for the future of financial services from the perspectives of the client, the advice profession and the fund management industry. From blockchain and Nest to platforms and advice, it was a thought-provoking and compelling day.
My contribution was to deliver the so-called ‘soapbox’ slot. The topic was where advice charges may go, how they might interact with other elements within financial services, and what the eventual benefit to clients might be.
I have the benefit of having recently sold my equity in my previous firm. This means I can look at things without any commercial imperatives or stresses - to sit down with a clean sheet of paper, so to speak.
So this got me thinking about how I'd approach things if I was to start over, and go back to running an advice firm.
As with any new business, I'd be keen to incorporate new ways of thinking. I'd also be looking to gain inspiration from firms based both here and, say, the US, which were demonstrating different ways of doing things.
The question I'd be asking myself is: What would a new advice business need to do differently in order to stand out from the crowd?
A charges evolution?
I like to think that over the years of running a financial planning and wealth management practice, I always tried to be client-centric on charging.
For context, I was an early adopter of platforms, early to being 'fee-biased' and very early to being fee-based.
I negotiated fund and platform charges for clients and passed these over in totality to the client. My view was that doing all of these wasn't just good for the client, but also served as a key differentiator in terms of service.
Taking all that into account, my approach to the presentation was to consider how advice charges might evolve and, hypothetically, how might I go about building a brand new business with that in mind.
What might the charging structure look like? Who might I need to negotiate with to deliver it, and why?
But before I turn to some potential answers, I want to take a step back and explain my thinking a bit and where I'm coming from on this.
Firstly, I know just what's involved in running a successful advice business, and what it takes.
Owner managers have to contend with a raft of issues, not least the constant cost pressures, and the inevitable inflation of team salaries, supplier costs and regulatory fees.
It's worth making the point that I don’t believe in a race to the bottom on charges. Firms must be sustainable in order to continue to operate and deliver great service to clients.
I am also acutely aware that a lot of the media focus is on the charges levied by advisers, but often less on the supporting services.
All practice owners will operate their own business in the ways that work for them. It is not for me to second-guess them.
As I mentioned before, this was a hypothetical exercise. Yet any exercise where we put clients at the heart of the issue and which could lead to better outcomes for them must be worth conducting. Critique is not criticism.
Who charges what
Turning to the problem and some potential solutions, I mind-mapped all the charges I could think of and who charged them.
I have been around long enough to remember the transition of adviser charges from 5 to 7 per cent initial, to '3 plus a half'.
We now appear to have gone through another transition, which puts the initial cost of advice at around 1 to 3 per cent, and ongoing advice charges at between 0.25 per cent and 1.25 per cent, plus platform, product and fund charges. I appreciate there are other charging models, but this seems to be about right for the mass market.
They all, rather obviously, come from the client in one way or another.
Whether it's adviser fees, or platform, product or fund charges, these are all essentially client fees. In turn, this equates to an overall reduction in yield.
Gbi2 managing director Graham Bentley discusses this idea here, and his description of ‘reverse compounding’ and how it impacts longer term investors makes for a compelling argument.
So, back to my presentation. I argued that new charging structures were appearing, and they were worthy of investigation by advisers. If nothing else, it’s worth understanding and modelling them even if they're not eventually adopted.
If the Investment Association Managed Sector has pretty much doubled over 10 years with the income reinvested, this means that ad valorem adviser, platform and fund charges have also pretty much also doubled. Can we really say that our costs and risks have doubled in the same period?
As it happens, I had been shown a report by someone else at the conference which graphically demonstrated the effect of fees on investor future fund values. That technology that showed the impact of fees clearly is set to become available to the public.
There are other things to take into account when considering charges.
A recent report from the European Securities and Markets Authority appears to favour passive over active fund management, but of course we don't all see it in such binary terms.
In my presentation, I reflected on just how many small advice firms had limited research and analysis capability. There can often be single points of failure, with perhaps just one investment professional carrying out due diligence, fund research, asset allocation and trading.
I also touched upon how larger clients appear to continue to subsidise smaller clients, even post-RDR, and discussed the tougher reporting rules and drive for transparency under Mifid II.
Doing things differently
All this led me to conclude that if I were starting again I would take a lead from some of the early adopters of different charging structures.
This might include flat fees, task fees or income-based fees for so-called 'Henry's - those clients that are 'high earners, not rich yet'.
It might also include cap and collar fees (maximum and minimum limits), as well as fixed fees.
I would model these and work hard on how I might use technology to deliver improvements and savings.
There would be attempts to negotiate further discounts, or preferably flat fees, from platforms. I would make every effort to deliver savings wherever possible across the whole client experience.
For example, some wrappers such as Sipps can be free when accessed via platforms. There are huge differences in discretionary fund management charges, fund charges and other elements of the client experience.
What is the adviser's role in identifying these variances, and driving value where possible?
My conclusion then, as now, was that for lots of reasons I expect ad valorem fees will be here to stay.
But I also expect these to come under increased scrutiny.
We are already seeing progressive firms, perhaps those with high-net-worth clients, start to explore different ways of charging. These firms are deploying fee structures which reduce potential conflicts and what's more, they are seeing this feed through into attracting more clients.
The initial online response to an article discussing my presentation has been a fair few advisers who are unhappy that I have dared to openly discuss a more client-centric and transparent charging structure.
The experience has left me feeling that should I ever wish to start again and differentiate my advice services, I might just be on to something.