The Markets in Financial Instruments Directive (Mifid II) is expected to switch regulatory attention on to pension costs and charges at the point savers use them to pay for their retirement lifestyles.
Mark Polson, principal at industry consultancy firm the Lang Cat, said portfolios were particularly sensitive at the turning point between saving for a pension and drawing funds for retirement, which was an area the regulator was keen to get right.
MiFID, implemented in the UK on 3 January, introduced new levels of transparency in the investment sector. It dictates firms reveal all costs of an investment, including previously hidden transaction costs.
The Financial Conduct Authority (FCA) has long said it wants to see advisers provide value for money, meaning the total cost of investing cannot erode the return on the investment.
Mr Polson, speaking at 7IM’s retirement challenges roadshow on 1 February, said: “There’s a perception the regulator wants you to [move to fixed fees]. I don’t think that’s true but I do think particularly at points at which portfolios are sensitive, at the point that you start taking money back out of these things, they will want to see good practice in terms of a mindful work and a link between what you are doing for the client and the stress that you are putting that portfolio under in terms of [total] charges.
“You get away with it more in accumulation. The swing of this onto the post-retirement space is going to be absolutely crucial and if I was a betting man on where the [post-MiFID] thematic work would swing to, that would be where it is.”
Mr Polson predicted investment cost would come down to pre-Retail Distribution Review (RDR) levels once MiFID was fully implemented and charges were scrutinised in the open.
He said: “Fees are important. They cover you to keep trading but allowed to run rampant they can really punch a hole for clients at this stage of life.”
The Lang Cat’s research found the lowest average people said they charged was 112 basis points, covering the ongoing costs to the funds (OCF), ongoing adviser charge, and platform cost. The highest was 176 basis points.
“That’s nonsense,” Mr Polson said. “Whenever you ask people about cost they will generally deflate it by about 50 percent.”
He said average overall cost was closer to 175 basis points, while many other cost were more like 225 basis points.
He said 150 basis points would become the acceptable standard. “Coming back down to 150 is about right. Guess what, that sounds a bit like a pre-RDR world to me.”
The problem, he said, was many advisers did not know what the total costs were.
One adviser had told the firm he charged 5 per cent. Mr Polson said: “Either this guy is ripping his clients at a magisterial level or he hasn’t got a clue what it is he charges. And I suspect [the latter] is true.”