Annoying as it may be, the supermarkets know exactly what they are doing. They know that they are not going to shift these goods this week, but they are literally setting out their shop window to say that when the time comes, they are able to meet all our Christmas needs.
Arriving just one week after Christmas is the RDR regime. The increased professionalism and transparency of fees will be a positive influence in the eyes of prospective clients. If we were supermarkets, we would have been heralding this event for months now, ensuring that our customers were aware of the improved opportunities that are available and thus maximising the sales opportunity. Despite not having the manpower of Tesco’s and the like, advisers have been busy rising to the many challenges of RDR, ensuring their businesses are ready for the new regime.
The latest challenge comes in the form of the FSA’s consultation on changes to adviser charging rules to prevent ‘kick-back’ payments from discretionary fund managers.
The FSA says: “Payments from DFMs or the provision of non-monetary benefits have the potential to bias advisers towards discretionary services, and if payments vary between discretionary investment managers, to bias advisers towards recommending discretionary services that pay the highest amounts.”
This fundamental concern that advisers will select the services of the highest bidder is surely outdated. Advisers would be driven towards the most suitable solution at the most reasonable price. Or am I being naïve?
As importantly, the FSA have proposed that in future, advisers should not be remunerated by DFMs and must be paid separately by the client. Advisers are going to have to agree with their clients what fee level they are going to receive and then presumably invoice them. Looking from the client’s point of view, this is a healthy practice, as transparency will help to cap overall fee levels. However, for the adviser, things may not be quite so comfortable; not only has he to persuade clients that he should be paid for a service being carried out by the DFM, he must also regularly account to the client, reminding him of both the fees he is paying and the value he is receiving. If we remain in a low growth environment, then it is likely that there will be some uncomfortable conversations between advisers and their DFM-invested clients;
Adviser: “The markets have moved broadly sideways over the past year, but I’m pleased to report that your portfolio has not lost any value.”
Client: “But I have paid both the DFM and you for looking after my money. All of my profits have been swallowed up in fees.”
One can well imagine this sort of conversation leading to a new fee negotiation, but who would get squeezed? The DFM who is running the portfolio on a day-to-day basis, or the adviser who is not? The general portfolio performance is largely outside the control of the adviser, but it is he who the clients will look at when they feel they are not getting value for money from their fees.
Earlier this week, an adviser reportedly said that the process of asking your client for a fee rather than being paid a kick back from a DFM could be a barrier to sale. If this is the product of the FSA’s actions, then it is to be applauded. Clients should be as fully informed as possible regarding fees. In turn, this will increase competition and lead to better value service within the industry.
Unlike directly held DFM portfolios, the FSA accepts that wraps are allowed to pay adviser charges directly. This has perhaps increased the popularity of DFM model portfolios held on wraps. The adviser can still outsource the investment process (but not the responsibility) while being paid from the client’s wrap account. This somewhat removes the adviser’s fee from the client’s consciousness, although the total cost to the client is not necessarily any cheaper than the direct DFM route, with wrap fees typically adding between 25 to 50 basis points to the equation. There are many advantages to holding assets on a wrap, but from the client’s point of view, adviser charging is not necessarily one of them.
When considering DFM model portfolios, advisers should also be wary not to place clients into a model that does not precisely fit their needs. The FSA have clearly stated that such “shoehorning” of clients funds does not constitute suitable advice. In order to circumvent this problem, advisers must look to individually tailor each client’s portfolio, in order to precisely meet their objectives. This can be quite a time consuming task, particularly when at the heart of the portfolio sits a DFM model which cannot in itself be tailored in any way.
An increasingly popular investment solution for advisers is that of insourcing the asset allocation and fund selection from an independent third party firm. In this way, advisers can receive all the information they need to provide tailored portfolios to their clients, which focus on asset allocation while keeping costs low. The adviser pays a fixed monthly subscription for the insourcing service, thus keeping client fees to a minimum. From a client perspective, their relationship remains exclusively with their adviser and they do not pay additional fees for the insourced information. Occasionally, one of the unfortunate by-products of RDR is that the client ends up paying higher total fees. Insourcing removes this problem, giving the client a robust, low-cost investment service.
Despite the uncertainty over DFM adviser charging, there are clear routes available to ensure that your centralised investment proposition delivers a high level of service to your clients at a low level of cost, with you, the adviser remaining in complete control of your clients.
Once the CIP is in place, it is time to start spreading the news to the clients. After all that is what the supermarkets would do.
Philip Bailey is partner of Assetfirst
Key points
Arriving just one week after Christmas is the RDR regime
The FSA has proposed that in future, advisers should not be remunerated by DFMs and must be paid separately by the client.
When considering DFM model portfolios, advisers should also be wary not to place clients into a model that does not precisely fit their needs
