Online Financial Advice - Transparency

I was doing some research yesterday, looking at online financial advice. The good news is there are more sites cropping up offering access to online financial advice. While I obviously believe that is a good thing, I was struck by the lack of transparency about fees.

It still seems incredibly difficult to get a clear, concise quote as so how much advice will cost. Most sites either don’t link to their fee information at all, or suggest the fee can vary depending on your personal circumstances. There is logic to this – without knowing your personal situation, tax position, risk profile, previous investment experience, etc, etc, it is difficult to judge how much time an adviser will need to put in to provide the advice required and therefore what to charge. 

I put this problem to an accountant friend of mine who charges set fees for drawing up client’s end-of-year accounts. Without knowing how complicated the accounts will be, how can he know what to charge? The answer was simple: He has been drawing up accounts for 30 years. He has enough experience to know how much work is needed for the average set of accounts. He then adds in a suitable margin, and that’s the set fee. Sure, there will be some that take longer and eat into his profit, but there will also be those that are much quicker, reinstating the profit average.

Any decent financial adviser will know how much time the average investment takes, and therefore should be able to set a fee. So, if you’re looking for online financial advice and wondering how to judge one firm from another, I would suggest a good first step would be how transparent they are about fees.

Going Direct

There was a good article in last weekend’s money section of the Telegraph. It was by Kyle Caldwell, and the theme was investors who are trying to keep their costs low by investing direct with fund managers rather than use an adviser.

In finance, as in life, one would expect to see reduced fees if one was to cut out the middleman. Sadly, fees and charges in finance are not always clear and the normal rules don’t always apply. As the article pointed out, there are two charges to consider – the ongoing charge and the front-end charge. The ongoing cost of investing as measured by the annual management charge - AMC - has long been 1.5%, which includes 0.5% commission paid to the broker. You would think by cutting out the broker, this charge would reduce to 1%, but that’s not the case. All that happens is the fund manager keeps the extra 0.5%, while you don’t have a broker to call and get updates from.

Now, the investment world has changed and it is easier to see the 0.5% the Broker is earning, but the principle remains the same – if you go direct, you will pay the full AMC – including the broker commission.

While that all sounds rather unpalatable, the front-end charge is worse. Traditionally, that has been 5% of the amount you are investing. So if you’re investing £10,000, that’s a fee at the outset of £500. From that, the Broker traditionally kept 3% and the fund manager kept 2%. With the new rules recently introduced banning commission, fund management groups have launched funds with no front end charge, leaving the broker to charge their fee direct. This is great as it means you can see who is earning what from your investment, although in many cases the broker is costing you significantly more than the previous 3%.

More importantly, however, is if you decide you don’t need the broker and go direct, the fund manager will only give you access to the old-style funds – which still carry a 5% charge upfront.

The basic principle here is don’t assume the fund management group, or indeed the adviser, will pass on to you any cost savings from the new rules. In the world of personal finance, profit is king and the fund managers will run with old-style funds and high fees for as long as they can get away with it.

So what’s the answer? If you want to go direct, use a platform or fund supermarket. They act as bulk-buyers and most have secured clean funds with no front-end fees, and usually don’t charge you anything to invest. If you’re not sure what funds to buy, use a broker – at www.reckitthouse.com we provide fund advice online, so maybe we can help. 

The missing adviser

Writing a blog is a funny thing. You start in one direction and end up somewhere completely different – or having a rant - which is never good! 

This blog was started after reading Richard Evans’ excellent piece in the Telegraph about hidden commissions being paid to advisers through old-style products. The theme is an old bug-bear of mine – advisers quietly enjoying regular trail commission without actually providing any service to warrant such a payment. As Mr Evans pointed out, a client can even “sack” an adviser, but unless they switch to a clean share class, they will continue to pay the full charge and the adviser can continue to receive the commission – and how many clients know about clean share classes?   

I have my own examples of this practice; a recent new client invested through a local adviser 16 years ago. They invested one lump sum of about £25,000, and that was it – no top-ups or withdrawals since. However, that lack of activity meant the adviser had no interest in looking after them, and he has not been heard from since – despite 16 years of annual commission which was supposed to pay for an ongoing service.

I know of a few advisers in my area who are currently working hard at getting in touch with past clients with whom they have had no contact for years. Why? Because they need to switch the commission to a fee before 2016. There seems to be no sense of embarrassment that they have ignored the clients for years while taking the commission. Rather, they seem to take the view that this is all the FCA’s fault and is adding to their burden! There is a feeling of entitlement to the ongoing commission. 

This entitlement theme was illustrated in a recent case I worked on; the ex-adviser, a large national firm, were quite clear in their defence – the “Ongoing Servicing Charge” was a “contractual payment” with no corresponding obligation to provide an ongoing service. So why was it called an Ongoing Servicing Charge? 

It all comes down to that old question of Trust. The public needs advice – now more than ever. But they won’t turn to advisers until they can trust us to behave properly. To build trust, we need to start by being transparent – and I think that is the theme I want to focus on. There was a lot of talk about disclosure of charges recently following the FCA review and a lot of comment in defense of advisers who have tried to act according to the rules. But in my view that misses the point. The disclosure rules should be a minimum requirement, not a target. We should have enough confidence in our own service, and indeed in our own fees, to be comfortable disclosing both up front, before the client has even met us.

Try this as a test; visit ten IFA websites, including our own Reckitthouse.com, (shameful plug, I know!) and try to work out what fees you would pay on a £100,000 investment. I would suggest the vast majority will say something like, “it depends on this” or “it could be between this and this” or “contact us first”. There is a genuine reluctance to be open and honest about fees. And that feeds the suspicion that we have something to hide. Not knowing what the fee will be up front, before the client has even walked through the door, is a barrier. 

I believe more should be made of this point. A prospective client shouldn’t have to wait for a meeting before being told what the fees will be. Any adviser who has been doing the job for many years, has seen many clients, and arranged a great number of investments – large and small. Surely by now they can make a good estimate as to what the cost is likely to be?

So there it is, my call to arms. I challenge all advisers to make their fees clear up front. Not an estimate between £500 and £2,500, but a specific figure, up front, before the first meeting. Transparent and understandable.

Oh, and if you’re receiving ongoing commission – do something for it.

Friday Ditty

Problems Everywhere,
You're juggling everyone,
You do your best each day but,
when the sun goes down, it's done, it's done,
and what slips through the cracks is just gonna go ahead and fall,
Don't let it keep you up nights when,
you know, my friend
you cannot win 'em all.

Transparency - Again!

In the wake of the recent FCA report on fee disclosure, I thought it would be timely to repeat my thoughts on transparency. This is a complete copy of a previous blog, so skip it if you've already read it. But I guess the point is this topic does keep resurfacing. Advisers still haven't come to terms with being honest about their fees. And lets be clear, this is not about satisfying FCA guildlines. It's about being honest and up front about your fees. If they're fair, why not be clear about them?

Fees and Transparency - Reprised 

What is it about IFAs and fees? They make a big noise about being “fee-based”, with the implied professionalism that tag brings, but then try to hide the fee for as long as possible. Perhaps it’s a hangover from those commission-laced halcyon days where earning 7% on an investment bond was the norm.

Whatever the reason, having trawled through page after page of google search for “Online Financial Advice”, I’m amazed at how few advisers are willing to make clear their fees. The standard response seems to be to quote a range of fees. For example, one firm claims to charge a minimum of £750 just to meet the client, then “up to” £5,000 to produce their advice.  In another example, the ongoing fee was quoted as being “between 0.5% and 1% per year”. Even a limited grasp of percentages can see that’s double. If that was a quote from a builder, would it be accepted? 

And these examples were among the few that even quoted figures. The vast majority would only clarify the fee after a meeting to discuss your situation. Well, I don’t want to meet with anybody without knowing beforehand what it will cost and if you’re unwilling to make your fees clear on your website then I’m already suspicious. And the industry wonders why there’s a trust issue in financial services.

For those advisers who do make their fees clear, it’s hard to quantify and compare because so many firms express their charges differently. There’s the firm who have a banded fee structure, where they charge 3% for the first £250,000, 2% for the next £250,000 and 1.5% for the rest compared to the firm that charges £2,500 for the advice report followed by an implementation fee of 0.5% and an ongoing fee of £1,000 per year. There are flat-rates, percentages and itemised fees all mixed up, making it difficult to compare.    

     

With the launch of our new online service, www.ReckittHouse.com, we wanted to see how we stacked up against potential competitors. So, we put these different fees, coupled with a few more we could find, into a spreadsheet and it was striking how expensive getting advice can be. For an investment of £100,000, with one example, the initial fees came in at 5.75% while with another it was 3.5% - fairly typical across the board. Little wonder IFAs are reluctant to be transparent about fees.

At Reckitt House, we came in at 1.5%.

When we take into account the ongoing fees, then over the first 5 years of the investment, the total cost ranged from 6.5% to 8.5%. At Reckitt House, with our increasingly competitive ongoing fee of 0.5% per year, our total fees, including initial and ongoing, came in at only 4%.

So transparency is an issue, as is the actual fee level, but more interestingly, these fees seem to rise as the investment amount falls. Yes, that’s right – the less you invest, the more you pay. That’s because so many of these fees are flat-rate – such as the firm which charges £750 for the first meeting followed by up to £5,000 to actually invest your money. Even on a conservative estimate, an investment of £10,000 will cost about 18% - £1,800. If there is indeed a growing advice gap, where so-called “smaller” investors can’t access advice, I would suggest it is more down to excessive fees than any lack of demand.

Anyway, back to us! Reckitt House is all about being transparent, and our Price Promise will help to protect the majority of investors who simply want advice they can trust at a fair price. Being transparent (or making a shameless plug) could be about being brave, but actually we think it’s about being fair. If we feel our fees are fair to the client and us, then why not tell the world about it?    

Spotlight on Advice

In the wake of last week’s budget, it is interesting to see how debate and comment is swiftly moving on. For a couple of days it was all about digesting the details – the liberation of pensions and expanding of ISAs. Then things moved on to what that meant, and what new options would be available to retirees. And now that is giving way to a realisation that with so much choice on offer, people need help. 

And so that brings us back to the question of advice; where do people go to get advice? What does advice look like? How is it provided and what does it cost? These questions were interesting before the budget, with the growing “advice gap” being created by banks pulling out of the market and Advisers focusing on high net worth individuals. With the budget well and truly throwing the cat amongst the pigeons, the demand for advice must surely increase. Will the banks come back into the market to meet this demand? Possibly, but given what a hash they made of it last time, let’s hope not. Will Advisers offer their services to small pot holders? Doubtful, given the profit margin on their new business models. The harsh reality is the advice gap is not their concern.

So where does that leave us? My view is those of us who do want to deal with everyday people - the normal, mass market that holds an average of £50,000 in a pension pot or simply wants to use this year’s ISA allowance - need to find a new, modern way to supply our advice. And in my view that lies with the internet.  That doesn’t mean it has to be automated, it just needs to be delivered over the web – in some way. That will help keep costs down and allow us to reach the maximum audience. 

If there is a way to combine some of the unique benefits of face-to-face financial advice with a distribution method that the next generation of savers and pensioners feel comfortable with, then surely that is the future of financial advice.