Advisers are most concerned about regulatory and inflationary costs posing foreseeable harm to their clients as the Financial Conduct Authority’s consumer duty looms.
With regulatory requirements driving up firms’ operating costs, over three quarters (77 per cent) of advisers are wary this could cause foreseeable harm to both their clients and investors more broadly.
A lesser majority (65 per cent) are also concerned about the impact of inflation will have, and is having, on clients, according to NextWealth’s latest consumer duty report published yesterday (November 16).
Inflation is now at a 41-year high of 11.1 per cent.
Most financial advice firms are already focussed on helping clients achieve desired outcomes, but documented evidence of this focus is lacking.Heather Hopkins, NextWealthIncoming regulation like consumer duty, which must be implemented by firms before the end of July 2023, requires advice firms to evidence the value of their services.
But this requirement is posing one of the hardest challenges for firms.
The report found “the biggest gap” in financial advice firms when preparing for the incoming consumer duty was gathering evidence to show they are doing the right thing.
Only half of financial advisers are confident that they can calculate the expected total cost a customer will pay - despite this being required by Mifid II - and that they can track costs incurred in delivering service to clients.
“Until now, financial advisers have relied mainly on investment performance to evidence value. This must change. Investment performance is of course important,” said NextWealth founder and managing director, Heather Hopkins.
"But the real value of financial planning and advice is peace of mind, a sense of financial wellbeing and as one of our consumer interviewees said, being able to sleep at night.”
Hopkins reckons the industry will see more of a focus on financial advice firms creating audit trails for decisions and actions taken on behalf of clients.
“Most financial advice firms are already focussed on helping clients achieve desired outcomes, but documented evidence of this focus is lacking,” she explained.
“This will put an onus on product providers to offer more transparency. Financial advisers will rely heavily on back office system reporting functionality.”
Average fees
Smallest of all was the number of advisers (9 per cent) who were fully confident they are able to benchmark fees and charges.
After surveying 605 financial advisers, NextWealth worked out the average fees clients pay for on-going advice, funds, portfolio management and the platform.
It found:
• 36 per cent of advised customers pay between 140bps and 179bps all-in.
• 19 per cent pay 200 bps or more and 13 per cent pay less than 80bps.
• There are three distinct peaks in adviser on-going charges, at 50-59bps, 70-79bps and 100-109bps.
• The average fee for on-going advice is 68 bps but charges vary significantly by region.
The consumer duty also requires IFAs to clearly define a target market – or more likely markets – for the products and services they offer.
The NextWealth report found 40 per cent of advice firms do not have a defined target market. Some said this feels “at odds” with their desire to offer a bespoke service.
The idea is that with a defined target market, advice firms will have an agreed process, product range and pricing structure to follow, even if the specific outcome is bespoke to that client, according to the report.
Looking ahead
Hopkins reckons there will be a proliferation of tools and portals launched as firms race to meet the July 2023 consumer duty deadline.
“We’ll see more adviser portals from DFMs [discretionary fund managers] to offer portfolio look-through and historic changes to holdings and rebalances. The same is true for providers of governed or insured products, such as smoothed funds.”
She also predicts financial advisers will reduce the number of DFMs they work with as they look to develop fewer strategic partnerships to meet the needs of defined target markets.
“We will see a rise in tailored models and insourced CIO [chief investment officer] as firms tighten their proposition and focus on delivering a cohesive and consistent customer journey,” said Hopkins.
As for platforms, the NextWealth boss said these providers will need to use data analytics to nudge advisers to act at certain points.
“Platforms can identify if there is a cheaper share class, if a charge looks out of line or if no change has been made to a client account for several years despite on-going charges being levied,” Hopkins explained.
To ease fee pressure, Hopkins said advice firms will have to innovate by using tiered charging, cap and collar and even subscription fees.
ruby.hinchliffe@ft.com
