Does Consumer Duty herald the end of percentage-based charging and cross-subsidies between clients?
Rachel MacRae, Compliance Consultant at B-Complaint thinks so. Despite the FCA not officially changing its stance on percentage-based charging, Rachel says “[The FCA] has implied that they don’t like ongoing advice charges” and advisers “should ‘take note’ of this, despite it still being allowed”.
Her view on cross subsidy is equally clear. She says, “smaller fee clients being subsidised by larger fee clients is in itself a potential value issue. You shouldn’t be cross-subsidising in your business”.
But her view is not universally shared. Many advisers feel they won’t have to change the way they charge, if they can evidence it’s providing fair value.
Today, we debate, should you change the way you charge your clients to give them fairer value?
Should advisers change the way they charge?
Most, but not all, advisers charge clients a percentage of their investment to cover set-up and ongoing service. The fees charged are surprisingly similar to the commission amounts advisers received before the Retail Distribution Review (RDR), with most still having an element of cross subsidy between clients.
Will Consumer Duty force firms to find a fairer way of charging clients? Morven Grierson, Compliance Director at MKC Wealth feels that change is needed. MKC Wealth is a relatively new firm, which has been built with Consumer Duty in mind. The firm has decided against percentage-based charging in favour of a combination of fixed fees and percentages.
Morven thinks that this combination allows advisers to “better articulate what the client gets”. But it’s not always that easy for more established firms. Part of MKC Wealth’s strategy is growth through acquisitions and Morven acknowledges the challenges with legacy businesses, saying that “the industry will take a while to move towards a fairer fee structure”.
But not everyone shares this view. Scott Gallacher, Financial Planner and Director at Rowley Turton, isn’t planning on changing the firm’s charging structure. “[Consumer Duty] doesn’t outlaw percentage-based fees, which we typically charge”.
Scott’s view is shared by many advisers; however, the big question is how to evidence value when charging percentage fees.
Evidencing Value
The FCA has said that advisers need to demonstrate how they have established that products and services offer “fair value”, but have left how to do this up to advisers.
Scott said about Rowley Turton, “We charge less than the average adviser and we provide an above average service, then by definition it must be great value because you’re winning both ways.” Part of Scott’s evidence of fair value is based on Vanguard’s 2020 Adviser Alpha study, which concluded that clients receive on average 3% of value each year (either from investment returns or tax savings) from having a financial adviser.
For most advisers, value seems to be intrinsically linked to price, but Rachel doesn’t think this has to be the case. “It’s about showing that there’s value in the service. It’s not a race to the bottom”.
Morven shares a similar view, “As long as we can demonstrate why the cost is the cost, then I think it’s absolutely fine”. Morven also believes that it’s OK to charge more for higher-risk work. Using tax planning as an example, she says “It’s more risk to our business but it’s also more valuable to the client as you’re reviewing their tax situation as well as their investment situation.”
Cross-subsidy
The issue of some clients cross-subsidising others has been debated since the introduction of RDR in 2006. The view from compliance expert, Rachel, is that smaller fee clients being subsidised by larger fee clients is “in itself a potential value issue”. She’s clear, “you shouldn’t be cross-subsidising in your business”
But there is a moral dilemma here. Cross-subsidy allows individuals with lower asset amounts to receive advice. If there was no cross subsidy, the barrier to receiving advice would be higher, widening the advice gap.
Scott argues that “cross-subsidy exists in every business.” “Many advisers” he says, “engage in pro-bono work, which is an extreme form of cross-subsidy.”
His other point on cross-subsidy is hard to argue with. FCA fees are based on turnover, not on the work required to supervise each firm, which will no doubt include an element of cross-subsidy. It would be hard for the FCA to ban something it practises itself.
Morven feels that firms should make sure every client is financially viable, saying cross-subsidy has “been an issue for some time”. MKC Wealth have set up their advice process and fee structure to reflect what the client is actually receiving. “The fee moves from very small when it’s focussed [advice], up to high when it’s more complex [advice]”.
Many firms are exploring “low touch, low fee” services for those with simple requirements as a means to address the Advice Gap.
How to review your fee structure
If you’re wondering how to review your fee structure, Rachel says firms don’t need to “go back to the drawing board”. “I would only expect firms to review their fee structure (above confirming it offers fair value) if they found an issue or didn’t have data to back up their claims.”
Instead, she recommends the following steps:
Benchmark yourself against the competition: compare fees and services with other firms to ensure a competitive offering.
Validate your clients are using the services they’re paying for: make sure clients benefit from the services included in their fees and adjust offerings as necessary.
Ask your clients if they’re getting value: use client feedback to determine the value of your services and identify areas for improvement.
Articulating (and documenting) your decision
Whether you chose to change your fee structure, or not, as a result of Consumer Duty, you now must now be able to clearly articulate “why” you’ve decided to charge the amount and way that you do for services. “I think it’s reasonable” or “because we’ve always charged that way” just won’t cut it in our new Consumer Duty world.
