Financial Conduct Authority  

Advice fees branded uncompetitive as price clusters revealed

Advice fees branded uncompetitive as price clusters revealed

The advice market is at risk of being found uncompetitive as 86 per cent of advisers who charge ongoing fees fall into three 'price clusters'.

Latest data from the Lang Cat showed around 70 per cent of advisers charged an ongoing fee for their services and the vast majority of these levied either a 0.5, 0.75 or 1 per cent charge on their client.

The consultancy firm polled about 200 advice firms in December and found a hefty 38 per cent charged 1 per cent.

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More than a quarter (27 per cent) charged 0.75 per cent while 20 per cent had a 0.5 per cent fee, leaving just 14 per cent of firms charging a fee outside the three main clusters.

But the City watchdog is likely to find this level of price clustering uncompetitive, industry experts have warned.

Mike Barrett, consultant at the Lang Cat, said price clustering was a “key indicator” a market was uncompetitive and warned the Financial Conduct Authority could make moves to address this in the future.

He said: “The FCA has been conducting a competition and markets study. The first part was on asset management, the second on platforms. The third will be financial advisers and the same approach will be adapted to each.

“In 2015, the regulator looked at a chart of asset management fees and found a stark price cluster at the time.

“It was not instantaneous but the FCA thought it was an indicator the market was not competitive and took action. I think the same will happen with financial advice.”

Rory Percival, former technical director at the FCA, agreed the regulator was likely to crackdown on this. 

He said: “The FCA is likely to find the advice market uncompetitive and to quote price clustering for ongoing adviser charges as an indicator of this.”

When asked, the regulator did not want to comment but it is understood the FCA will look at price clustering as part of its advice review into competition and consumer needs.

Mr Barrett also said it was clear from his work with advice firms that the decisions behind such ongoing fees were not well-calculated or thought through.

He said: “With the initial fee, you can often see good calculations on services performed and hours spent. With the ongoing charge, it’s often difficult to see any rationale for the charge levied.

“I do not think advisers ask themselves, ‘why am I asking for 1 per cent?’. So how do you ensure the service is value for money? Or that it’s covering the costs?”

Gillian Hepburn, UK intermediary solutions director at Schroders, said more advisers were opting for a blended approach, with a low ongoing fee but fixed fee charges for particular services.

Mr Barrett said it was primarily firms who had gone through the “process of Prod” — the FCA’s product governance rules which came into effect January 2018 — who leaned towards blended fees.

Mr Percival agreed, adding it was a “good solution” which “firms should think about”.