Consumer duty compliance: showcasing the intangible

But one thing I keep hearing is: 'Carla, I feel like I’ve hit a brick wall with what to do next. How do we take all the intangible stuff we do, and evidence that it’s fair value?'

Most financial planning firms do not know where to start. And that is not because they do not deliver value. Most absolutely do. But it is because there is an awful lot of ‘stuff’ that planners do that is quite difficult to quantify when we are thinking about value assessments.

The most common one I am asked about is: 'How do we quantify peace of mind?'

And my answer is: easily.

One of the things you have to do first is really nail down what the Financial Conduct Authority means when it references value and fair value.

If your client did not have an adviser, how would they behave differently?

It tells us that value is the relationship between the amount paid by a client for the product, and the benefits they can reasonably expect to get from the product – in an adviser's case the product will largely be their service proposition.

They then go on to say that a product provides fair value where the amount paid for the product is reasonable relative to the benefits of the product.

Now in my opinion those definitions are about as helpful as a chocolate fireguard. They give very little steer in terms of ‘how’ you go about assessing fair value.

So, if you are an advisory firm, what is important is thinking about the benefit your services (or other products depending on what you do) provide to your clients, and turn every single benefit into something tangible.

Let’s take peace of mind as an example.

Most firms will provide peace of mind to their clients in one guise or another. They will offer peace of mind at different and varying stages of their clients' lives, and on a variety of different matters.

Peace of mind could be in relation to financial markets and volatility; it could be a simple phone call to say: 'Sit tight, don’t worry, remember you’re in this for the long haul.'

It is really easy to align what advice firms do with their clients' goals and objectives.

Peace of mind could be: 'Based on our research, analysis, and cash flow planning, you can retire today, and you’ll be more than financially secure for the rest of your life.'

It could be: 'Yes, you can afford to take £10,000 out to buy a new conservatory.'

Or it could be: 'We’ve got your expression of wish forms in place, you’ve sorted your wills, we’ve got your last power of attorney done, and the potential inheritance tax liability has now been successfully mitigated, so your family will have much less to worry about as you age and eventually pass away.'

Some of these examples we can quantify really easily, such as the IHT mitigation for example. That is a tangible number. But others are not immediately as easy to quantify.

And this is where thinking about behaviours comes into the mix. And starting to drill down into the ‘benefit’ part of some of your softer services.

It is all about behaviours

If we say that fair value is all about the benefit the client can reasonably expect weighed against the cost, then we must think about how we define ‘benefit’.

Advice firms arguably have an easier job at this stage, because it is really easy to align what they do with their clients' goals and objectives.

So advice firms can look at their advice services and ask themselves the question: 'Does what we offer to our clients allow them a significantly better chance of achieving their goals and objectives compared to not taking our advice services?'

And when answering this question, you have to show your workings.

So how does behaviours fit into all of this?

Well, think about it. If your client did not have an adviser, and was doing everything themselves from a financial perspective, how would they behave differently?

• Would they invest in the same products?
• Do they have the knowledge to know how to use the most tax-efficient wrappers?
• Do they understand the intricacies of their myriad of different pensions, and why one with that protected pension commencement lump sum might be better off staying where it is?
• Do they understand the most tax-efficient way to take income?
• Do they understand risk and their ability to bear risk?
• Do they know how much they need to save to retire at their target age of 55 on £50,000 a year?
• Do they understand the effects of inflation on cash deposits?

And the list goes on.

But all of this ‘stuff’ is vital in you evidencing the benefit in what you provide, because there is a real tangible argument that says without an adviser a particular type of client will not use different wrappers or their allowances appropriately (if at all), because why would they? They are not financially qualified professionals.

And there is a lot of research that has been done over the past 15 years around financial behaviours of individuals in the UK.

Think about how your client might behave if they could not pick up the phone or drop you an email.

There is evidence to suggest that individuals in the main save significantly less when they do not receive advice. There is evidence to show that individuals typically invest significantly less without an adviser and hold more assets in cash deposits. 

And this is really important when we think about value, and the benefit advisers add.

Because what advisers must do is ask themselves the question of every single element of their service proposition: 'If my client did not receive this service, how would they behave differently?'

And the answer to that question is how you then begin to make the intangible, tangible.

So let’s go back to the first example: peace of mind.

Most firms within their service propositions offer the client the ability to phone their adviser whenever they need them. And most clients do.

They phone their adviser when they are worried. They phone their adviser when they are looking to withdraw some money from their pensions. They phone their adviser for a multitude of reasons. So think about how your client might behave if they could not pick up the phone or drop you an email.

Understanding behaviour is where an advisory firm can really begin to pull out the value-add of their service proposition.

During the early stages of Covid-19 when we saw the markets fall through the floor, did your clients rely on speaking to their adviser for reassurance and peace of mind? If they did not have that communication, would they have sat tight and not disinvested?

For a big proportion of clients, without an adviser, they would have panicked at that point.

This is vital. Understanding this behaviour is where an advisory firm can really begin to pull out the value-add of their service proposition.

If an advisory firm can show that a client is much more likely to meet their goals and objectives by taking advice (and factoring in the additional cost that comes with that), versus going it alone (and not having the additional cost, but doing things very differently), then you have got a big chunk of your value assessment done.

The latter part is then considering how you compare to your peers from a price perspective, and considering whether your fees are competitive. If you are at the top end of fees then you need to think about why that is, and document it.

So if you are in the camp of not really knowing where to start with a value assessment, the behaviours of your clients with and without advice is going to be a really strong foundation to start on.

Carla Langley is owner and founder of Langley Consultancy