3rd July 2017

A fair day's wages for a fair day's work.

My father was a builder before he retired and throughout his career the way he was paid evolved and adapted depending on the employer or customer he had at the time.

When he first left Ireland for London, he was happy to work for a set daily rate, doing as the words of the famous Dubliners song said, building up and tearing England down.

As he learnt his trade and became established, he and his colleagues took advantage of the 60’s building boom and began to work on what is termed in the construction industry as ‘piece work’. This is where they were paid a fixed ‘piece rate’, for each road kerb installed and gas box fitted and being hard workers made a very good living.

Again as time went on, he found the pace of piece work harder and harder to maintain and then decided to instead tender for one off projects, using his expertise to identify how to deliver each job professionally and profitably.

No matter how he was paid throughout his career, he took pride in his professionalism, expertise and ensured he always lived his life by the Thomas Carlyle principle of charging a fair rate for a hard day’s work delivered.

I see a strong similarity in the advisory profession, especially in light of the recent FCA Asset management market study.  While this looked at the asset management sector, advisers must be aware that it will have major implications for their profession, particularly when it comes to remuneration.

I would urge you all to read the full study, but there are 3 quick takeaways for me: 

1. 1.     Active management may not be worth the extra charges  

The FCA estimates that there are around £109bn in ‘active’ funds that closely mirror the market which are significantly more expensive than passive funds.

While it should be noted that the FCA found that investors do not choose to invest in funds with higher charges in the expectation of achieving higher future returns, there is however some evidence of a negative relationship between net returns and charges. The FCA also found some evidence of persistent poor performance of actively managed funds. 

1. 2.     Trail commission will be reviewed again

Despite stating in the FCA interim review in November that it had no plans to revisit its policies on trail, it now appears that the whole issue surrounding off platform investment trail commission is back on their agenda. The FCA will now seek the views of the industry on whether it should stop these trail commission payments, and if so over what time period.

It will also ask if contractual arrangements prevent firms from switching off trail commission as it stands, and more worryingly what effect a sunset clause would have on trail commission for other products! 

1. 3.     Platforms don’t get off lightly

The FCA will instigate a review of the platform market to identify if there are any barriers to switching platforms. The FCA believe this work is required to ensure that platforms demonstrate and promote effective competition that is in the best interests of the consumer.

In what will be called the ‘investment platforms market study, “ the FCA will consider how direct-to-consumer and intermediated investment platforms compete to win new and retain existing customers and whether platforms allow retail investors to access investment products that offer value for money.

This study and especially the other areas above will have an impact on how the advisory profession are paid in the future. Also current remuneration models may have to evolve further as will how advisers communicate the value they add to consumers.

FCA data shows that adviser charging is now the overwhelming remuneration option in the UK advisory market, with 81 per cent of initial charges and 78 per cent of ongoing charges paid this way. The remaining proportion of fees is paid directly by the client to the adviser.

When it comes to calculating this adviser charge, percentage charges wins hands down, with more than 4,000 firms using this charging structure for both initial and ongoing charges.

Charges by the hour were only used by 1,663 firms for initial charges and 1,259 firms for ongoing charges. Fixed fees were used by 1,971 firms for initial charges and 1,215 for ongoing charges.

Given that the average charges for initial advice were 1 per cent minimum and 3 per cent maximum and 0.5 per cent minimum and 1 per cent maximum for ongoing service, has RDR really changed the way the advisory profession charges consumers?

Another important question I would ask is “has the advice profession managed to sell its benefits to consumers in the wake of RDR?” sadly it would appear no.

Figures from Legg Mason, which polled more than 15,000 investors globally, found that 76 per cent of UK investors would refuse to pay the typical hourly fee of £150* for financial advice. *Source unbiased.co.uk

A third of investors said that they would refuse to pay anything at all, while only 10 per cent said that they would pay £150 or more. Of the remainder, 29 per cent said they would pay a maximum of £49 per hour, while a further 11 per cent said they would pay between £50 and £149.

On a positive note, the survey indicates that younger people are happier to pay for advice than their older counterparts. Only 17 per cent of millennials rule out paying for financial advice and nearly 20 percent are happy to pay a rate of £150 per hour or above.

This I would argue gives those firms in the profession for the long term a platform to build on, but only if they review how they calculate their charges and begin to positively communicate how they will receive ‘A fair day's wages for a fair day's work’.

John Joe McGinley Glassagh Consulting June 2017 

Business Development, John Joe McGinley, Glassagh Consulting