The cost of central investment propositions for clients is likely to fall by nearly a third over the next five years as price disruption ripples through the investment space, experts have claimed.
A report from the Lang Cat, published this week (July 20), predicted the total cost of ownership for clients’ CIPs could drop by 50 bps from the current average of between 1.7 per cent and 2.3 per cent.
This would bring the average annual total cost of a CIP to 1.55 per cent.
The consultancy had polled 110 advice firms in May 2020 and found the vast majority (82 per cent) operated a CIP — bundling advice fees, platform costs and fund manager charges into one total cost of ownership for their clients.
|Total CIP cost||2.28%||1.55%|
In terms of the investment solution part of the CIP, the Lang Cat predicted the solution management costs would be brought down “close to zero” while the underlying investment costs could drop to 0.65 per cent.
It said: “We’re already seeing a race to the bottom for the managing and provision of portfolio structures.
“Vertically integrated propositions are routinely charging either a zero or very low fee for MPS management; they make their coin from the underlying assets themselves.”
Although the fund management part of the investment solution was a “harder nut to crack” and as a “trillion-pound industry” would be the last thing to adapt to changes, it would still absorb some of the pricing pressure, the report said.
The Lang Cat marked pricing disruption in the investment solution part of the CIP as “inevitable”.
Platform costs also contribute to the overall CIP charge. According to the report, the ‘average’ charge is currently in the region of 0.32 per cent, likely to fall to 0.25 per cent in the next five years.
Outside of costs, the Lang Cat said the platform market was “poised to fragment”.
“There will still be a place for the established brands and propositions, not least since many advice firms are happy to work this way.
“However, the demand for lower cost ‘no frills’ services, integrated with the back-office system and client portal is growing.”
The final part of the CIP’s cost is advice fees, which are currently under some pressure from low-cost services, such as EQ investors and OpenMoney, and the regulator’s beady eye on the suitability of ongoing charges.
According to the report, advice firms were likely to “gradually slide ongoing adviser charges” down from an average of 0.81 per cent to about 0.6 per cent in the next five years, eventually reaching a long-term anchor price of 0.5 per cent.
The Lang Cat said: “The simple fact that advisers define the total cost of investing inevitably means they look to other elements of the CIP to reduce costs, before turning to their own advice fees.”
However, the report urged advisers to keep a “close eye” on the regulatory direction of travel and to “at least position themselves accordingly”.