Consultants North Highland UK have called for advisers to display their fees in pounds and pence, arguing that clients are increasingly confused by percentage charges.
Joanna Hall, vice president financial services at North Highland UK, says that some percentage fee structures may also be disproportionate to the services offered. “Fees charged as a percentage of assets under management are increasingly perceived by clients as unclear or disproportionate to services offered.
“For example, where £100,000 AUM commands an advisory fee of £1,000 per annum at a 1 per cent rate, a client with £500,000 AUM is charged five times the amount (£5,000) for the same service.
“As a result, advisers may be pushed to display fees differently in the future to maintain client satisfaction.”
She said that advisers might, for example, charge clients who want to delegate everything to their adviser. A more flexible charging structure will also help advisers build better client relationships.
“In addition to client segmentation by asset size, segmentation based on client preference enables advisers to offer a menu of services that are priced accordingly.
“For example, some clients prefer to delegate everything to their adviser, whilst others pick and choose the activities they wish their advisers to undertake on their behalf,” commented Ms Hall.
“With clients increasingly expecting personalisation of service, a shift occurring in retail and banking sectors, financial advisers will increase prospects of building longstanding relationships by taking client preferences into account.”
The Financial Conduct Authority wants more progress on charge disclosure.
In its ‘Retail investment advice: Adviser charging and services’ published in December 2014, the regulator said it remained concerned a lack of clear disclosure, in cash terms, of the ongoing charges for service.
The report said: “Our consumer research suggests some consumers have limited awareness of the fees they are paying for ongoing services. Given ongoing services are central to the services many firms offer their clients, it is important that firms disclose these charges clearly.
“Firms should therefore consider how they communicate information on ongoing services to their clients and how effectively it is understood.”
Gina Miller, founding partner at SCM Group, said that until now few clients of advisers knew how much they were paying for the recommendations they received and criticised the regulator for not taking swifter action.
“Fees are rarely displayed up front or and shown in a simple understandable format where all the different fees, at all levels, are added together. Consumer research we conducted back in 2012 found that 84 per cent of investors wanted total fee transparency in one total number.
“Recent research by the FCA found that only about 10 per cent of advisers or wealth managers giving advice actually show worked examples of their own charges on their websites, even fewer actually include all the other charges or show this in pounds.
“The onus is on clients to be the detectives, ask a myriad of questions, presuming they know the right questions and language to use, and work out the impact this would have on their pot of money. In no other industry or sector do consumers have to do this. They are granted the basic right of knowing how much they are paying.”
She added that the European Commission is taking action and that from January 2017 under Article 23 of Mifid II, all advisers and wealth managers will have to show the total costs in pounds and pence of charges over the course of the investment, at least once a year and when requested by a client.
The Investment Association said it supports the standardisation of information under Mifid and FCA regulations.
Mike Gould, retail markets specialist at the Investment Association, said: “We note that Mifid II includes a costs and charges disclosure requirement so that firms will have to disclose all costs and charges associated with an investment service (such as giving advice) added to the costs and charges of the product (eg. an investment fund), in pounds and pence, both at the point of sale and on an annual basis.
“Mifid II also gives the FCA the option to require standardised presentation of this information. The FCA has consulted on whether it should standardise disclosure and the IA has urged it to do so in order to assist consumers to make meaningful comparisons across all investment products and services.”
ruth.gillbe@ft.com
