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How will the consumer duty affect advisers' fees?

How will the consumer duty affect advisers' fees?
(Chris Ratcliffe/Bloomberg)

Since July the countdown to implement the Financial Conduct Authority’s new consumer duty has begun, with firms generally having been given 12 months to apply the new rules.

One of the regulator’s expectations under the duty is that firms should provide services that offer fair value.

When it comes to adviser charging, the most common method is a percentage fee based on the size of an investment. But there has previously been debate over the fairness of such fees.

Percentage fees based on the amount clients invest are also a key factor in what makes the financial advice industry attractive to private equity investors, according to Daniel Baade, CEO and co-founder of corporate finance boutique Dyer Baade & Company.

“Over the last 10 years or so when the markets have basically gone up, apart from a few ups and downs, the fees went up by the same ratio, and that made it very attractive for investors.

“So as markets went up, revenue went up; and the assets of a financial adviser or wealth manager tend to be relatively stable because they are across different asset classes, and so they don’t fluctuate as strongly as the markets fluctuate.”

Will the consumer duty spell the end of percentage fees?

With percentage charging being the most prevalent method, SimplyBiz head of business consultancy Karl Dines says what firms should consider in light of the consumer duty is particularly relevant.

Dines highlights how the duty broadly states, among other things, that:

  • the price a customer pays for service should be reasonable and fair value compared with the benefits;
  • the price and value outcome does not require all customers to be charged the same;
  • in a percentage model, some may pay larger fees than others, even though the costs and benefits of providing the service may be similar.

One issue firms should consider is reassessing the groups of clients they advise, whether there should be multiple groups and if there should be a different percentage charged for different groups, he says.

“All firms are unique, and assessing charging in order to follow the duty will mean different things to different firms, and that’s okay,” Dines adds. “What is absolutely clear though is that all firms should consider how they charge and demonstrate a good price and value outcome.”

Paul Caine, associate director at ATEB Compliance, notes how many firms typically charge all clients the same percentage.

“Your typical IFA tends to have a few ‘lower value’ clients from an assets-under-management perspective – they'll have a few in the middle, and then they might have one or two in the top," he adds.

“The challenge with the consumer duty is, given those different client banks with different needs, how are you going to be able to demonstrate that you’re offering fair value? It is going to be a challenge; it is going to have an impact on the industry.”

Caine says there could be a shift away from the percentage-based model of charging on a longer-term basis, or towards a more hybrid model where advisers begin to charge for the different services they offer.