I had the pleasure of catching up with Rory Percival earlier this week to discuss the regulatory landscape and all things PROD (given the air time I’ve given PROD of late you could be forgiven for thinking it’s my favourite subject! I do have other interests. Really). We spoke about the Financial Conduct Authority’s (FCA) market study, announced earlier this month, which will review both the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR).
Rory explained that the FCA is very focused on value for money in the advice sector, an issue compounded by our non-competitive market.
At last count 26 million britons had fallen into the ‘advice gap’ at a time when advisers are turning away new business (research indicates that 69% of advice firms turned away prospective clients in 2018).
These stats are shocking. They show that the key characteristics of an efficient, competitive market simply don’t apply in our sector. If an advice firm were to drop its fees by 50% it would have little impact on client demand. And, without the competitive pressure to perform, players are not kept on their toes to deliver exemplary service. Firms can essentially charge whatever they like, without fear of driving clients away.
Given the FCA’s statutory objective to ensure competition works in the best interests of consumers, understandably, this is a concern. However, I have a far greater concern about what this ‘drive for value for money’ will mean for our profession.
Let me explain:
» Value is personal. What I deem to be of high value, will no doubt be quite different to the next person. For example, last week I caught up with a friend who is an avid cyclist. He thinks nothing of spending a few hundred pounds on bike ‘kit’ (I’m sure that’s the technical term), a spend which is completely lost on me. If I were to estimate the production cost of a piece of kit I probably wouldn’t pay more that c£50. Financial planning is the same. It’s a grey area and like anything in life, if you can demonstrate value, cost is never an issue.
» Low cost doesn’t mean value for money. My father has a saying: “some people know the cost of everything and the value of nothing”. Cost and value are not the same thing. I’m concerned advisers’ might be tempted to seek out the lowest cost options for their clients in order to comply with the legislation, rather than sourcing the best possible solutions for their needs (this article is particularly relevant – the passive puzzle: driving down cost at the expense of return).
With cost at the fore, how are advisers demonstrating value?
In today’s MiFID II environment of fee transparency, it’s more important than ever to be able to demonstrate value. Over recent months I’ve spoken with advisers about how they’re tackling this issue and several mentioned they have undertaken specific projects to calculate, validate, and articulate the value they add (one aptly named it her ‘value project’).
Two examples include:
» The one page value statement. This document visually illustrates the value the adviser has added over the course of the year in an infographic-style design. From hard facts, like specific tax savings or IHT planning, to softer activities such as introductions to other specialists to address specific needs or areas of concern (Will writing or Lasting Powers of Attorney, for instance).
» Cash flow charts before and after fees. This approach involves showing the client’s situation pre-planning, with any shortfall in retirement income or other missed goals alongside a chart to illustrate how planning has addressed these issues. The chart is then re-run to demonstrate that even after fees, the client is better off.
According to Vanguard, adviser alpha – the added value an adviser contributes over the course of a year – is around 3%. Often, this is because the adviser acts as a coach and mentor, stopping clients from making silly decisions that could decimate their finances.
But, how does one demonstrate this? My approach would be to capture all client conversations, then prior to the annual review meeting, model the impact of any path(s) not taken and visually present this back to the client.