Advice for the masses

Kevin O’Donnell

Kevin O’Donnell

If financial advisers are to grow their share of the wealth management market – as they should - they need to charge less to reach a wider range of clients. They are simply too pricey for the majority of the UK population, a problem exacerbated by RDR.

In the good old days (around November last year) the true cost of advice was masked by hidden commissions and provider subsidies, but that is no longer the case. Adviser charges and fees are now open to full public scrutiny and the fact is that many clients do not like, or cannot afford, the costs.

This is not the fault, in the main, of advisers. In many ways hidden commissions in the past allowed them to reach people who could not normally have afforded financial advice – perhaps one of the few real benefits of the indemnity commission system – but also a system that made financial advice affordable to a wider audience and attracted clients who could not normally have afforded to pay fees. A market distortion, if you like.

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The fact is, however, that providing one-to-one services of any kind will always be expensive. Ask any dentist or GP. Financial advisers know this too. When a client meets up with a financial adviser, wealth manager or financial planner he is not just paying for an hour of your time, he is paying for 10, 20, or 30 years of professional experience and that is an expensive commodity.

This cost ‘barrier’ to using a financial adviser will not change without a radical rethink, not just by the adviser community but also by the regulator.

I was a little concerned recently to learn that the regulator may be turning its attention to the apparent similarity between pre-RDR commission earnings and post-RDR fees. Of course it is right for the regulator to shine its spotlight where it sees fit, and there is no suggestion of wrongdoing, but I question whether the regulator really understands the economics of small businesses.

The fact is that if it took a certain amount of money to run an IFA firm last year it will take a similar amount this year and those costs have to be funded. Intermediaries need to generate sufficient revenue to pay their bills and see a reasonable profit.

That is not rocket science or smoke and mirrors; it is just basic economics.

While it has not been analysed well, I suspect there was considerable shock among many advisers’ clients when they were told that the advice they had previously believed was ‘free’ (but was actually paid for by product commissions) was no longer ‘free’ and they would have to pay for it. I have not seen many studies look at how many consumers decided, as a result, to drop their adviser and ‘self invest’, to use the new parlance, but I have no doubt it was quite a few. And good luck to them; many will do fine as long as they have a good grasp of asset allocation, efficient portfolio management and long-term tax planning. It is perhaps similar to patients of a dentist deciding to pull out their own teeth to save money; you could but would you want to?