It is arguably the defining theme of the Retail Distribution Review, yet at times it has appeared to be either an irrelevant sideshow that has failed to bring about any real change.
Removing commission was the regulator’s headline act in the RDR. It was to revolutionise the way clients perceive advice and remove the latent bias that has historically concentrated investment into particular areas of the market.
But recent studies have shown that the new rules have thus far prompted little genuine change to the old ‘3 plus a half’ model.
According to a review of 40,000 pension cases by Selectapension, 3 per cent remains the most popular initial advice charge, while the erstwhile 0.5 per cent trail taken by the adviser remains almost equally as popular in its rebranded guise as an ‘ongoing advice charge’.
The study - and another produced by Action Consulting - suggested that initial payments may be falling slightly across the sector and ongoing charges commensurately rising. We’re talking superficial rebalancing, not the expected major overhaul.
The reality is, however, that charging arrangements were unlikely to change overnight. Advisers were busy getting qualified for the RDR until January and have been waiting to see how the new world would play out. The time for innovation, perhaps, is now.
One adviser I spoke to is using a model I’ve certainly not seen before and that could be an example of the sorts of new ideas we will see coming through in the months and years ahead. In short, he applies “stacked” rather than “absolute” percentages for his initial fees.
In the fairly typical absolute arrangement, the client pays an initial fee equal to a certain percent of the amount being invested in each case, usually on a sliding scale. So every £10,000 Isa investment is charged at the same rate to every client.
In a ‘stacked’ charging model the same sliding scale is used but with a key difference: it includes any assets already invested by that client.
So a client who already has £250,000 invested with the adviser would pay a lower rate for that £10,000 Isa, or any other investment for that matter, than a totally new client or one with only a fraction of that already invested.
The ongoing fee the adviser takes can be the same under both systems.
On one hand, using a stacked charging could be really good for a new or growing business. Because costs decrease as the total amount invested grows, this pricing structure theoretically will encourage clients to grow their portfolios and allow advisers to foster long-term relationships.
On the other hand, it means that how much you are being paid does not necessarily correspond with the service you offer. Why should one £10k Isa be worth one amount and another worth another amount? Surely they will take the same amount of time to set up and maintain?
One sticking point could be where the price begins. If your initial fee descends as the portfolio grows, it could be hard to sustain a business where the initial fee on the very first, say, £10,000 is on a level with other advisory firms, but then diminishes as a client invests more.
Either way, it is an interesting model and one that I’d love to hear readers’ thoughts on.
More encouraging that the specifics of this one example, though, is the attempt to do something a little bit different. We’ve seen and heard of a few such examples of late and this can only be a good thing for the sector.
In a world where regulatory fees and costs are increasing, the regulator itself demands disclosure of minimum charges and adviser fees are still frequently blasted in consumer press comment boards, it is important that the industry does not remain rooted in the past on remuneration.
