Long ReadJan 26 2023

Consumer duty: Nine in 10 advisers have no plans to revise charges

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Consumer duty: Nine in 10 advisers have no plans to revise charges
(Hollie Adams/Bloomberg)

Exclusive research from consultancy Alpha FMC has found that, with regard to the consumer duty, nine in 10 advisers (92 per cent) have no plans to alter their charging structure within the next two years.

Although 92 per cent may seem like a high number, Nicola Butterworth, advice and compliance director at ValidPath, says the figure is about right.

RDR back in 2013 was, I think, the point where every firm had to really look at their charging structure. That was the really big shift, going from primarily a commission-based industry, to having to justify your fees to the client because they were going to pay you directly.

Nicola Butterworth, advice and compliance director at ValidPath

“I think that was the big point where all firms went, ‘we have to know what we’re charging, why we’re charging, and the services that we’re providing because we have to have those conversations with clients’.”

With the industry having been through RDR, Butterworth adds: “I think adviser firms have generally got a charging structure that works for them and works for their clients. They can justify it, and they have to disclose their fees on a regular basis, because Mifid II means all the charges have to be disclosed every year.”

Bradley Northrop, head of the retail distribution and advice practice at Alpha FMC, agrees it is perhaps not that surprising to see that many firms are not looking to alter their charging structure in light of the consumer duty.

But he thinks this is because many firms have not yet undertaken the work around consumer duty to examine the way they charge in detail.

“We don’t believe the regulator is arbitrating on whether particular charging mechanisms, such as ad valorem fees, are the right structure. That decision is entirely down to the market and individual adviser firms to determine. 

What is critical is how advice firms are documenting and evidencing price and value.Bradley Northrop, Alpha FMC

“However, what they are looking for is for advice firms to examine whether the price of the service is a reasonable cost compared to the benefits provided to the customer, both upfront and as part of an ongoing cycle.

“When they undertake this exercise, we expect firms will need to examine and, in some cases revise, their pricing structures to ensure this is more closely tailored to the different client segments they are serving.”

Overall, the focus is not on whether advice firms are looking to change their pricing model, adds Northrop. “But what is critical is how advice firms are documenting and evidencing price and value.

“There will be greater scrutiny on advice fees or total cost of ownership, so advice firms need to focus on developing the framework to define, evidence and monitor value going forward.

“We think this will drive advice firms to spend more time defining propositions that align to the specific needs of different client segments. In most cases this is innately being done already, but it will create an impetus to ensure that firms are better engaging clients and demonstrating how value is delivered.”

Regulation the biggest area of concern

The Alpha FMC survey, taken in the final quarter of 2022, also found regulation to be the foremost concern among advisers.

Bradley Northrup, head of the retail distribution and advice practice at Alpha FMC

“Although regulation is obviously well intentioned, it often creates challenges for firms to action and evidence,” says Northrop. “Often it’s the interpretation and understanding of the regulation, which creates the challenges, rather than the regulation itself.

“We see this in how firms approach fact-finding and suitability assessments. Typically this manifests in having to identify, capture and document a significant amount of data from multiple sources, and then playing every single piece of that back to clients, often in 80-plus page suitability reports.”

Technology slowing advisers down

Besides suitability reports, technology is also presenting an issue, with three in 10 advisers (31 per cent) saying it slows them down. Additionally, a third (34 per cent) said their technology stack did not enhance or hinder their business, identifying its impact as neutral.

“If it’s slowing you down, then ditch it,” suggests Progeny chief technology officer Tim Thompson-Rye. “While there are barriers to tech adoption, it is within every firm’s power to vote with their feet if a solution is not working for them, as well as make changes for the better.”

While Thompson-Rye says he has not personally experienced tech slowing them down when compared to a non-tech solution at least, he adds: “Inefficiency within tech solutions is rife, driven primarily by outdated solutions and business models and a lack of integration between systems.

“There are also some fantastic solutions out there that have transformative powers. They just need to be sought out.

“We need to stop tolerating inefficient solutions so that the market is forced to catch up with what firms really need. The fact that we are still talking about digital signatures as the biggest impact area is evidence of this.

“The right technology has the power to truly revolutionise a business and transform our clients’ experience for the better, but the barriers to both entry and adoption are often unfortunately too high for many firms at present.”

Chloe Cheung is a senior features writer at FTAdviser