• wblogo
  • wblogo
  • wblogo

Half of advisors think clients are being overcharged in the wake of RDR

Chris Hamblin, Editor, London, 10 March 2017

articleimage

The UK's New Model Business Academy, looking at the 'three plus a half' pricing standard that emerged at the time of the Retail Distribution Review, believes that the linear scale it offers is often now seen as unfair, especially for those with larger 'pots.'

The NMBA has 20,000 members, of which 139 responded to the questions it asked them in one of its regular communications. The results show that nearly half (47%) of advisors think that some clients are overpaying for the value of advice they receive, even though RDR was meant to provide them with the best results.

Amongst the NMBA members who felt that some clients were being overcharged for advice, the main concerns revolved around high fees for initial and continuing service; excessive charges for wealthy clients and charging for outsourced work.

However, 53% of advisors in the survey did not believe that clients were overpaying.

Tom Hegarty, the managing director of the NMBA, spoke to Compliance Matters. He said: “The regulator has never imposed specific terms on advisor charging, which may explain why there is such a wide range of charging structures in our profession. At NMBA 'best practice' meetings, this topic often provokes healthy debate and our findings demonstrate that there is a distinct lack of consistency across the industry."

The rest of this article takes the form of a question-and-answer session.

Q: Do you think that advisors know that overcharging is happening because they are getting price objections from their clients?

A: Generally they don't hear price objections, but they have their own pricing structures which they are always comparing with other advisors' pricing structures. This is how they find out what's going on. There are so many advisors out there, and so many pricing models. They all have very different cost bases - you might have an advisor with an office in the centre of London, who is bound to be at a cost disadvantage compared with an advisor who operates from his bedroom in Middlesex.

Q: What's the general charging model for HNWs that has emerged since RDR?

A: That's a good question. We haven't done a survey on the pricing model that every other firm has. There are so many advisors out there, and so many models. We do hear things at our 'best practice' meetings that we hold, however. It's generally a linear model, in percentage terms - 1% of the assets, let's say. This is the most common approach. Many in the post-RDR world are using tiered models, though - perhaps 1% for only £0-200,000, then 0.75% for £200-500,000, then 0.5% for more than £500,000. These pricing figures are not untypical of the things that were being bandied around before RDR, either.

You might think that the 'proportional' charging structure is unfair - the advisor is charging 1% in all cases and that means that if the client has £1 million, he's charging £10,000, but if the client has £10 million he's charging £100,000 even though he's doing nothing like ten times the amount of work. On the other hand, the more assets a client has, the higher the risk is, partly because there's a higher potential loss. Even then, though, it's not ten times the amount of risk, so it's very difficult to say. Proporional charges - i.e. the same percentage throughout, are more common.

Q: Do you have any words of advice for advisors about pricing?

A: RDR said that the charging structure must be aligned to customers' best interests. RDR got rid of commission and replaced it with fees for advice but that didn't entirely align advisors to the best interests of their customers. In many a case, the advisor's pricing model is based on only getting paid if his advice ends in a sale being made. When this is the case, he's often going to skew his decision to make that happen. This is a very common charging structure. It's called 'three-plus-a-half' and that figure relates to a percentage of assets - 3% as an initial fee, with ½% following on per year. If you're the advisor and you check the client's investments and come to the belief that he doesn't need to make any changes to his portfolio because he's getting the best returns already, you could walk away empty-handed.

Q: How did this structure come to be so common?

A: When RDR was happening, product providers did a lot of the work to help advisors through it. This was one of the recommendations from them. Even the regulator used these pricing structures as examples, saying things like "this is a typical charging structure." Many advisors are worried about doing something different from the others for fear that the regulator will accuse them of stepping out of line (even though they've broken no actual rules) because the regulator is unpredictable, so this pricing structure is still in place. Think of it as though you're driving down the motorway. If everybody's going at 80 miles per hour, you know that it's OK to drive at that speed too - but you wouldn't feel like doing it if everybody was only driving at 60.

Q: Do you think that this should be banned?

A: No. I've been in this business for 20 years and even I cannot think of a perfect charging structure. I think it could be mitigated, though. The advisor might do well to say to the client "I still need to be paid for advice even if it doesn't end in a sale. Let's have a minimum agreement." Even in the case of no sale, the client is not likely to doubt the fact that the advisor has done the work - most advisors will provide a full analysis of the portfolio. The ideal thing might be to say "I'll tell you how much work is going to be involved and I'll charge you just for that in advance," but that is hard to do. He could say "I'll provide you with all my reports and recommendations but I do need to be paid - do you want to go ahead?" Maybe a chartered advisor could charge more than a certified advisor in that case.

Q: Is the NMBA an accredited body?

A: No, we don't want to be. We've thought about it, but if anyone were to fall short we would have to de-authorise him and that could be a rigorous, difficult and potentially thankless task. And there would be no commercial gain. When RDR was coming in we helped our members get to level 6; now we focus on soft skills and apprenticeships.

Latest Comment and Analysis

Latest News

Award Winners

Most Read

More Stories

Latest Poll