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.”
He added: “If he doesn’t know and others don’t know because they are deflating it how can we say whether something is creating value rather than destroying it.
“This is concerning and this does not change pre- and post retirement.”
What’s more, the Lang Cat found in its annual research, which polled a variety of firms across the market, many advisers, though placing clients into centralised investment propositions, did not ever question and doubt the propositions that were put together.
Firms also did not change their investment approach when moving from accumulation to decumulation, it said.
Mr Polson said: “Virtually every firm we spoke to doesn’t change their investment approach. They might step down a risk band or make no change at all.”
About 19 per cent of firms polled moved new business to discretionary managers, adding additional cost.
Using FE data on DFM model portfolios and plotting 3-year performance against the ongoing charges figure of the portfolios, the Lang Cat found there was “no causal relationship between cost and the outcomes in the model portfolio sector”.
Mr Polson said: “The only thing you can tell about things that cost more is that they cost more.
“So the idea that when we are constructing a cost chain particularly in that sensitive post retirement space that we expose people to more because they get more and that takes away some of the pressure is nonsense.”
Robin Bradford, a pension adviser at Fleet Street Financial who attended the event, said adviser fees would have to come down and be presented in a more uniform way in the future.
He said: “Eventually, in four to five years’ time, IFAs will have to become like accountants and have fixed fees and hourly rates and all these different adviser charges will go.”
He suggested an acceptable hourly rate would be between £250 and £350 for an adviser and £200 for a paraplanner.
carmen.reichman@ft.com
