The consumer duty is here, and now the work begins to implement it in practice. The Financial Conduct Authority notes that many firms are already doing their best for their retail customers. But it also points out that too many are not.
In this new world, where the relationship between price and value is to be much more rigorously assessed against a principle that says "retail customers experience harm where they don’t get value for their money" must give pause for thought to the industry’s dominant model of ongoing servicing for an ongoing fee.
While the ‘cheapest is best’ argument of the past is clearly being replaced with a far more balanced assessment of what represents value, value clearly has to be related to outcome. According to principle 12, firms will need to "pro-actively act to deliver good outcomes for customers".
All wealth advice firms, in which an annual performance review is provided along with a ‘let us know if anything has changed' letter, will need to assess whether this reactive service meets this new standard.
Layered charging, one-size-fits-all charging and charging linked to the size of assets, all of which underpin the industry’s business model, come in for scrutiny.
Can firms demonstrate that clients understand the layers of charging from fund management, discretionary management, platform and adviser charge? Does this stack represent value for money for all clients all of the time?
Critically, where the same percentage charge is broadly made regardless of the size of assets advised on, does that represent value for money for larger clients, as well as for smaller ones?
Over lunch recently the head of a large network drew a pertinent analogy when talking about the consumer duty.
He told me: “I’ve worked with my accountants for years. They do my tax return and other bits and pieces. I pay them £1,500 a year, but I don’t give them a portion of my assets.”
And that is the obvious conclusion. If you are building a financial plan for a client with half a million pounds and another for a client with a quarter of a million, why should the first pay you £5,000 a year and the second only £2,500, if the ongoing work involved is similar?
The industry’s argument is that the adviser is adding more value for the first client because the sum is bigger. Under the lens of consumer duty though, the challenge would be to prove this and to do so in a way that clearly shows the client paying more is getting more.
This is a tougher question to answer if both are in the same central investment proposition, which is not being managed against clear objectives and preferences, and does not differ whether the client is in accumulation or decumulation. In decumulation, the value equation becomes tougher in a lower risk, lower return portfolio that is shrinking rather than growing.