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?
