Fees and charges are always big talking points within the UK financial advice sector, and some in the industry believe that they are set for an “evolution”.
International Adviser attended a breakfast briefing from Schroders and consultancy firm the Lang Cat on 22 January where they discussed their white paper on the Product Intervention and Product Governance Sourcebook (Prod) regulation.
Gillian Hepburn, UK intermediary solutions director at Schroders, said: “Last year, I think we were seeing a lot more advisers looking at a combination of an ongoing charge but fixed fees for specific services.
“Obviously, there’s an ongoing debate in the industry about this: should we charge percentages, or should we charge fixed fees?
“I think we’re in an interesting place where there’s a lot more, of what I call, blending going on, where advisers have been much clearer about very specific services and how they want to charge them.
“I think we’ll continue to see a shift towards that this year.”
Mike Barrett, consulting director at the Lang Cat said that firms give a lot more to their end client than just investment returns, including financial planning and support.
He said that advice firms are currently stuck with the ongoing fee model and don’t have a different option for clients at the moment.
Barrett added: “It’s that kind of evolution of a charging model [….] that needs to happen.”
Hepburn also said that the upfront charge is usually “very clear” to a client, when it comes services that have been delivered and work that has been done.
But she added: “I think the ongoing charge, in some ways, is possibly under pressure, in terms of really articulating it, for some advisers who are outsourcing the investment proposition.
“When many of them were managing the investment and it was easier to talk about the ongoing fee and what they were doing.
“I think that’s becoming a bit of a challenge.”
Under the radar
As well as fees, both discussed the issues with the implementation of Prod.
It was introduced to create a tougher stance – with clearer accountability – between product providers and the outcome that reaches the end client.
Hepburn added: “I always talk about how this snuck onto the radar a little bit with Mifid [Markets in Financial Instruments Directive] II. So, the focus was absolutely on transparency and charging.
“Many advisers probably thought that the Prod was only for the providers and not for them because they were classed as distributors within the regulation.
“I think, as an industry, we’ve moved away from talking about advisers as distributors.
“Adviser don’t sell products any longer, they give great quality financial planning advice.
“But this terminology, as distributors, meant that this regulation did apply to them and it felt like it was under the radar.
“A number of advisers have started to wake up to the fact that they should really be doing something to comply.”
The Lang Cat’s Barrett also admitted that advisers should be wary of the FCA cracking down on those not complying with Prod regulations.
“There are 20% of firms saying, we still need to do some stuff to ensure we are compliant with Prod,” he added.
“I think there were a lot of advisers very aware it was something they need to do, but they’re approaching it from a tick-box exercise.
“That, as a practice, is a little bit dangerous.
“It’s two years since this has come out, if you’re not complying with it, you are in breach of the rules; which is a not a good place to be from a regulatory point of view.
“Prod has become a quite useful regulatory stick from the FCA.
“If you’re not doing it, if you haven’t documented it, if you’re not regularly reviewing it, if you happen assigned somebody to take over based on SMCR framework, off to the naughty step for you.”
Since the introduction of Prod, there has been a rise in the number of conversations about segmenting clients, in a bid to make sure firms are providing the right solutions.
There have been a few debates in how it should be carried out.
The FCA recently said that firms should look beyond assets under management when segmenting clients, both Barrett and Hepburn agree.
“I think one of the key challenges is that the majority of advisers are still doing this by assets under management,” said Hepburn.
“And the thing that was encouraging was that more advisers are starting to look at life stages as a way of segmenting clients.
“I talked a lot about this last year, and our prediction was this will increase in terms of advisers thinking about segmenting their clients a bit differently.”
Barrett added: “We find people are starting to move away a little bit from portfolio side; but certainly, when we did this 12 months ago, portfolio size was the way of segmenting.
“That doesn’t meet the requirements of Prod, if you’re doing it that way.”