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Cost versus value

Cost versus value

Since the retail distribution review (RDR), when a clear fee-based structure was introduced, there have been many discussions around how to really demonstrate the value of advice. Many are reluctant to pay for something they can’t physically see, but people hire solicitors without batting an eyelid when they buy a house. So why should financial advice be any different?

Perhaps the main reason people do not want to pay a great deal for advice is that sometimes the true benefits can not be seen until many years down the line. Portfolio planning is a long-term activity.

Now three and a half years on from the RDR’s implementation, cost versus value is an issue many advisers struggle to explain to clients. In recent months, the topic has prompted much debate, with many pieces of published research saying more or less the same thing: many clients want to pay little – if anything – for advice.

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Investor survey

Recent research by Legg Mason shows that 60 per cent of UK investors aged 40 or over place little or no value on the services of investment advisers. The survey found that 39 per cent of respondents would never be willing to pay for financial advice, while another 21 per cent would pay no more than £50 an hour – well below the average £150 hourly rate. Just 3 per cent said they would pay more than £250 an hour. The study was based on a survey of 5,370 wealthy investors across 19 markets globally.

The survey also discovered that UK millennials place more value on advice, with more than 50 per cent of those between the ages of 18 and 39 open to paying more than £150 an hour, and just 9 per cent unwilling to pay anything.

Adam Gent, head of UK sales at Legg Mason, says it is surprising that investors over 40 are not prepared to pay the going rate, given that they are the ones who are best placed to pay for advice in a fee-based environment. “Perhaps younger investors, having been in markets for a shorter period of time, are simply less inclined to assume the responsibility themselves, and possibly more accustomed to paying upfront fees. Either way, their willingness to pay for advice bodes well for the long-term health of the advice sector.”

One way to encourage people to seek advice, and to demonstrate how valuable it can be, is to offer free consultations. Many advisers will already offer the first hour pro bono. During Financial Planning Week (starting 6 June), the Chartered Institute for Securities & Investment (CISI) backed a campaign to offer free, nationwide financial advice sessions for all members of the UK public. The aim of the campaign was to highlight that financial planning is a “relationship-based process”.

Peace of mind

Danny Cox, a chartered financial planner at Hargreaves Lansdown, says the value of advice will always be largely a matter of perception, and that it is difficult to provide clients with a “clear pound, shillings and pence cost benefit” analysis. “What price do you put on peace of mind?” he asks.

“What we have seen for some time, which has been accelerated by the RDR, is the number of clients wanting help with a specific issue but who from then on [want] to manage their own money themselves. There is still demand for the discretionary, delegation-type service. However, with D2C investment services as they are, there is often no need for an expensive, ongoing advisory review; and advisers working with this change of mindset will benefit from the service the investor wants and is prepared to pay for,” he says.