The Financial Conduct Authority, (FCA), has published a consultation paper with the less than engaging title of “ CP16/40; Enhancing conduct of business rules for firms providing contract for difference products to retail clients”, you can find the full text here; https://www.fca.org.uk/publication/consultation/cp16-40.pdf. So why am I, an Independent Financial Adviser giving it the oxygen of publicity on this blog? As a firm we do not offer access to these contracts and we would advise our clients to steer well clear for reasons that will become apparent later.
The politicians are treating long term care costs as a “solved” problem following the Dilnot Report and the Care Act 2014. Unfortunately, the headline measure, a cap on care costs of £72,000, (at 2016 prices), was kicked along to April 2020, so we have entered into a period of muddle and half-cut solutions. Anyone entering into this area as a prospective care home resident, carer or member of their wider family has to deal with a system under severe stress.
Although we all like to be thought of as rational creatures, experimentally we make relatively few decisions on the basis of logic and cold, hard reasoning. This creates problems and opportunities for ourselves, marketeers and suppliers, as we do not necessarily make the right decisions and we cannot generally articulate how we got there in any case!
Warren Buffett and Charlie Munger have been investments stars for 50 years now running Berkshire Hathaway Inc., the large conglomerate corporation. Every year Warren Buffett writes a letter to the shareholders giving them background details of the running of the business and pieces of homespun wisdom on how to run a company. Bill Gates, a big investor with Berkshire Hathaway, recommends that anyone in business should read this letter as part of their ongoing education. (please see http://www.berkshirehathaway.com/letters/2014ltr.pdf
There has been a revolution in financial services in the past few years but I am not sure that many clients have seen any benefits from it. One of the outcomes from the Retail Distribution Review, (RDR), has been the banning of commission for investments products but for many clients the impact has been negligible or worse, and perversely has been used to justify higher fees.
As an adviser, I am struggling to see the impact of low cost platforms and funds on clients; these highly automated systems should allow every adviser to make a respectable living based on time-costed implementation and less than 0.8% as a recurring fee for real, on-going advice. I am not seeing these being used as much as I would expect, given an economic need to remove administration costs from client expenses.
Historically, how was financial service advice paid for? Typically, this would have been 3%-5% commission and trail commission of 0.5% to 1% of your total investment. Post RDR, the disclosure documents look different but when you read carefully there is still often an initial fee of 3.5% and an ongoing advice fee of 1%, which is not significantly different from the old commission regime(1).
RDR has got the more discerning clients looking at the published fee rates and shopping around but do these really reflect the actual expenses needed to provide regulated, guaranteed advice? Unfortunately, for many potential clients, perceived costs are driving them to the DIY route, with potential disasters with day trading systems or ill-judged investments in buy-to-let property.
For other clients, they are getting their investments set up by the professionals, but then not having regular reviews to avoid the recurring fees. As they do not have regular reviews, their portfolio becomes unbalanced and any adverse market movement may have a disproportionate impact on their investments.
For us, RDR was long overdue, but the fee structure needs to be taken away from a cosy, pseudo-commission pattern. Just because the fee you are being asked to pay now is about the same as the commission you used to fund is not a good reason to do so. Worst still, not all advisers actually earn the trail commission they have been taking for ongoing reviews; the FCA are now looking closely at the provision of actual ongoing advice, so this is a spot to be scratched.
Best value for both clients and advisers is a long-term, stable relationship with the cost of advice set at a level based on economic necessity rather than what the market will stand! At too low a level the adviser will go out of business; at too high a level, the client is being disadvantaged. Actual and potential clients of independent financial advisers need to look out for the new normal, not the old orthodoxy!
If you would like us to look at your current arrangements, please contact one of our offices and request an appointment.