What can we learn in Ireland about adviser charges after RDR?

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RDR, the Retail Distribution Review in the UK – do you remember how it was to herald the end of the world for advisers in the UK? So what has actually happened, and what can we learn in Ireland from it?

I came across reports about 2 pieces of research that were carried out in 2017. The first was research carried out by the Financial Conduct Authority (FCA), which examined the different charging structures used by advisers. The second piece of research was carried out by New Model Advisor and looked at how much the Top 100 firms (as decided by them) actually charge their customers.

Interesting stuff, and I think there’s lots to learn for us in Ireland…

 

Fund based charging is alive and well

RDR was implemented in January 2013, and initially it was expected that commission as we know it would become a thing of the past in relation to pension and investment business. However trail commission has remained in place for legacy business written before RDR, and also the concept of “adviser charging” was introduced. This differs from traditional commission in that product providers, while being able to facilitate a payment of the adviser’s charge by deducting it from the investment, can only do so after obtaining and validating instructions directly from the client. So the adviser has to be able to articulate their proposition and justify their charge.

Now whether the adviser is paid by adviser charging or by fee, there is more focus on the quality of the adviser’s proposition and greater transparency of the charge amount.

So has this changed the structure of payments; whether advisers are being paid hourly rates, fixed fees or ad valorem (% of investment) fees?  Well not really according to the FCA research.

 

Type of charge

Number of firms
Initial charge Ongoing charge
Charge per hour 1,663 1,259
Percentage of investment 4,130 4,362
Fixed fee 1,971 1,215
Combined structure 905 799

 

So the majority (by some distance) still utilise the ad valorem fee basis, more than all of the other methods put together. Even more interesting, about 80% of the payments to advisers (by value) are actually collected via a provider / platform. This suggests that even when fixed fees / hourly charges are agreed, in many cases the clients prefer the fees to be taken from their investments rather than actually writing a cheque.

However there is also a sense that higher levels of one-off fees are being charged for one-off pieces of work, rather than the more blunt ad valorem basis. This makes sense – charging clients higher one-off fees for once-off complex pieces of work.

 

What level of advice fees are being charged?

The New Model Advisor research is very interesting in terms of the actual amount of fees being charged. Some of the highlights of this research include (based on a client aged 40 with a £250,000 portfolio),

  • The average ongoing adviser charge is 0.87% p.a.
  • The total average charge for clients, including the adviser charge, platform fee and fund charge is 1.78% p.a. – the advice fee represents just under half of the total fee charged to the client.
  • 38% of firms charge 1.0% p.a. of AUM
  • The range of ongoing fees is 0.41% to 1.25% p.a. Many advisers were shocked that some of their peers charge as little as 0.41%!
  • Only 7% of firms charge over 1.0% p.a.
  • Fees are increasing overall as advisers are doing more work for clients.

 

What can we learn in Ireland?

I think there are a couple of learnings for Irish advisers. In truth, each of these probably deserves a full article on their own! But here is a brief synopsis of what I take away from this research.

  1. The ad valorem model as charged in Ireland by many advisers is consistent with practices in the UK. While it’s not perfect, and has some obviously conflicts, clients understand it and see it as an alignment of interests.
  2. Clients in Ireland generally prefer adviser fees to be deducted from their investments. Again this is consistent with our nearest neighbours. So what has RDR really achieved, beyond potentially greater transparency of fees?
  3. Irish advisors are often undercharging! I’m still amazed that many advisers still believe they can / will service a client properly for 0.25% p.a. What’s the reason for this?
    • I’m often told that our base AUM charges are usually higher. Is this actually true when we see the average non-adviser (platform and fund) charges at 0.91% in the UK? Does this stack up as a reason in Ireland, except possibly when some of the more esoteric funds are being used?
    • Or have some advisers in Ireland not developed enough clarity, confidence and capability to communicate their proposition, in a way that demonstrates the incredible value you provide to clients? 

Food for thought…

For me the overall takeaway for advisers is obvious. Develop crystal clarity around your proposition and the tools to communicate it effectively and relentlessly. The confidence to charge more will follow.