OpinionJun 23 2014

Are you catching clients with the old-style charging ‘con’?

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Advisers have a new incentive to move away from the old traditional fee model of three per cent plus 0.5 per cent, after an article in The Times at the weekend warned readers of a number of schemes designed to circumvent RDR rules including the ‘con’ of not changing your charges.

The article published on Saturday in the money section of The Times says that regulations designed to get rid of hidden charges are being flouted.

Alongside obviously pernicious examples such as de-authorised advisers taking a cut in the dubious new role as an introducer, or those ‘passporting’ in from the Gibralter and still taking commission, under the heading ‘service charge con’ it refers to advisers that have maintained the commission charging model for post-RDR fees.

The article highlights those still charging 3 per cent plus a half and points out, obviously correctly, that advisers will often agree for this to be taken out of the investment rather than paid as a separate fee.

Malcolm Kerr, a senior adviser at EY Financial Services, is quoted as saying: “This can be perfectly fine but there is a major concern that the majority of advisers are operating new fee arrangements that turn out to be broadly identical to the old-style commission payments, with a three per cent initial charge and a 0.5 per cent annual charge.”

Does it really matter if advisers are still charging the fees they used to prior to the RDR, as long as they are agreed and the client understands what they are paying for?

Last year there were several surveys on this subject. Data by Action Consulting, published in August 2013, revealed initial charges have fallen while ongoing costs have risen,.but in truth the small survey of 79 found the apple had not fallen far from the tree,

Of the 79 firms who responded to the survey, the average initial fee charged for a £100,000 portfolio was 2.4 per cent, while the average ongoing fee for a £100,000 portfolio was 0.82 per cent.

Selectapension argued that not a lot had changed since the new rules came into force. Its more robust data revealed the majority of advisers were still charging clients an initial charge of 3 per cent and then 0.5 per cent for ongoing advice for pension cases.

Prior to the RDR, and even now, advisers tell me that clients are not, on the whole, comfortable with writing out a cheque and want the fee to be taken from their investment. It is wrong to allege that advisers are somehow doing something wrong because they are still using an ‘old’ charging structure.

However, it is equally clear that advisers are expected to be be seen to be changing their ways; to evolve in a more explicit fashion in order to avoid unflattering comparisons with the discredited past practices of a few.