The unfortunate risks of “advice on the cheap”
Should it cost an IFA £1500 to onboard a client
This is not a trick question , it is a genuine one. It stems from a tweet directed at me by Rob Reid
It’s now costs £1500 just to onboard a client, we have the irony of firms who offer zero protection to the consumer comparing their costs with those who take responsibility for themselves and others. The abandonment of caveat emptor has a lot to answer for in this mess
— rob reid (@reidremoney) February 29, 2020
I had actually been quoting a sentence from an article from 7im’s Chris Justham in Citywire
Asset managers generally believe opportunities across the different asset classes will be lower over the next decade than they were in the previous decade. This will make cost more of a factor for financial planning. Unfortunately, advisers want to provide advice that isn’t a cost burden to their clients [right now]. These pressures, combined with tightening regulation, make it difficult for advisers to reduce costs. The cost of investment management has got to do some shifting.
I say it is a shame that a fund manager thinks it “unfortunate” that advisers want to provide advice at the lowest cost to their clients but I think Rob heard something different.
If they don’t cover their costs and cross subsidize between clients then yes. But you miss the point why does it cost so much? Regulation and costs of “keeping the lights on” why is that weird?
— rob reid (@reidremoney) February 29, 2020
I remain a little confused but I think that where Rob and Justin are agreeing is that it is unfortunate if advisers try to cut corners to make advice more affordable and I think this accounted for some later “ad hominem’s” where advisers thought I was criticising advisers for “rip-off fees”.
But Rob is telling it how it is and he’s a practicing IFAs. these costs need to be met “to keep the lights on”
If it now costs £1500 to set up a client on your system , issue an engagement letter and have an initial meeting , then it is unsurprising that financial advice is too expensive for most people, if that cost includes the cost of acquisition, then that is another thing, but I don’t think that Rob was thinking about fees paid to lead-generators.
For industrial scale wealth management businesses , there’s software as a service such as Appway
But for most IFAs, on-boarding is mechanical , laborious and expensive. It is to many wealthy people – reassuringly expensive. I can understand Rob and Chris Justham’s point.
What troubles me..
We are 7 years on from RDR and since the end of 2012 IFA numbers have shrunk from 150,000 to 25,000. Those IFAs that remain are better trained, regulated, capitalised and behaved than before. They focus on wealth and typically are rewarded by ad valorem fees on money they advise on – or in some case manage.
I don’t find it weird that this has a cost or that the cost of £1500 is what it is. What troubles me is that when people see that cost challenged – they call it “unfortunate”. I think that “weird” in a troublesome way.
Let’s suppose someone wanted to set up an app which helped the employees of a large company understand their pension freedom options and gave them access to independent advice, help on entitlements from the state and issues to do with growing old and dying. If the cost of people downloading that app was more than £15 to the employee, I doubt it would be purchased. Indeed most people would consider that app should be free.
If all that app did was keep people from buying off the ad-pages of google, I suspect it would be bought by employers, provided of course it passed their due diligence.
And frankly, unless people used such an app to click through to an IFA, navigating an app would be as close as most people would get to “taking advice”.
What troubles me is that there is a perception that such a service is “unfortunate” and that people are either in and paying for the full advisory monty, or relying on pensions wise and their preferred search engine.
The FCA innovation hub
There is, within the FCA, an incubation unit called the innovation hub, which includes the FCA’s sandbox. It is there to encourage solutions that fall within the “regulatory perimetre” to challenge existing ways of doing things.
The key reason that innovators want to use the innovation hub is not to show off but to make sure that they are fit and proper. I know several firms who have been through the innovation hub and spent time in the Sandbox and those firms both bit and small are authorised and supervised.
AgeWage is in the innovation hub and awaiting admittance to the Sandbox, we want to understand how we can interact with ordinary people for whom the cost of onboarding let alone ongoing advice is prohibitive. I don’t think this is unfortunate nor do I think it particularly disruptive. I don’t think I will be eating any adviser’s lunch and I may be creating a market for financial advice (if the AgeWage service is used).
The key’s to bringing down the costs are of course to be found where they have always been found, by being more effecient and hence more productive. Technology of course has a part to play in that, but so does trust. If people don’t trust you, they won’t use your technology, however good it is.
Should it cost £1500 to onboard a new client?
I think that the full monty onboarding service probably has this kind of upfront cost attaching to it. So I wouldn’t call that cost a rip-off.
Do I think most people would pay that much for what they saw as essentially a “data capture” – no I don’t. People aren’t particularly interested in keeping other people’s lights on.
So I think that the full monty IFA experience is a minority sport – a bit like fox-hunting. One that suits a part of society but is not a mainstream activity.
Do I think that advice should be mainstream? Yes I do! I think that people are well advised to have a Pension Wise interview and will be well advised to use investment pathways. I think they will be well advised to use the pension dashboards and I hope that we will have open finance which opens doors to all kinds of modellers, products and financial solutions to our modern-day problems.
Around 700,000 people a year reach 55 and the financial equivalent of the Strait of Hormuz, around 100,000 are taking advice and less than that are buying into ongoing advice. The remainder of those attaining pension freedoms are getting nothing but google.
If it’s going to cost more than three quarters of us £1500 to get onboard with an IFA, these numbers aren’t going to get any better.
We do need innovation and that innovation is not unfortunate, infact it’s greatly to be hoped for.
£1500 would be hard to achieve at London overheads you could easily add £1,000 to this. Those that need advice are put off seeming advice by this hurdle.
How much of that is ‘labour’? If an advisor earns more the it ‘costs’ more too?
Hi Gareth. A large part of the cost is labour yes. But a large part of the labour cost is paying for compliance related activities. The normal costs of running a business with all the normal back office expenses are there in an adviser business. But then one has to factor in the cost of documenting advice in order to protect a financial advice business from being found guilty of failing to meet regulatory standards. Our glorious FCA has created a rulebook of layer upon layer of regulation, hour upon hour of time submitting reports via Gabriel, an environment where customers are assumed to be innocent idiots, and advisers have to document exactly why they recommend what they recommend. The cost of professional indemnity is steeper than can reasonably be expected for firms with excellent compliance records. In order to satisfy the compliance costs of documenting what good looks like adviser firms need hours upon hour of labour time. This escalates the cost of advice beyond what it needs to be.
Thanks Brian, I am grateful for you helping out on where this £1500 number is being spent. If the bulk of the cost is in consumer protection, then I’m worried that the FCA is pricing many people out of the advisory market. Rob Reid got annoyed that I didn’t understand all this but it’s hard to get concrete data on adviser pricing, if you know of anywhere where I can look at this in more detail- please point!
One of the major problems, which adds so much to the cost of advising on pensions in particular, is the plethora of different types of legacy pension, many of which have complex rules, valuable guarantees that could be lost if not recognised, errors that may need correcting, different tax treatments, different tax-free cash availability and the legacy pension providers all have different systems (if they have any at all!) and have resisted all attempts to streamline and standardise. Even the standardised simple statement, that providers could send annually to customers, is being resisted and the Pensions Dashboard is nowhere so far because of the errors and lack of IT compatibility etc. A financial adviser can take hours and hours just to get to first base for a client. That is before they even start to give any advice. The individual trying to find out what their old pensions are, where they are, what they charge and whether or not they might be better to stay with them or move away, would be expecting to navigate a minefield without stepping on anything hidden underfoot. So far, the fee-free or low-cost services do not ensure people understand all their old pensions, but leave the risk with them so the ‘adviser’ or ‘guider’ takes no responsibility. The expert IFA who will take the responsibility is saddled with huge costs of insurance and huge resistance to pay fees because of the legacy of ‘free advice’ offered by salesmen on commission who were supposed to have been dealt with by RDR, but the word ‘advice’ or ‘adviser’ is still confused by the FCA rules.
I totally agree with that Ros. The challenge for ordinary folk is that to get to a point where they can take the big decisions. All the evidence is that people who don’t take advice, take their tax free cash and hope that something better comes along. In many cases , the tax free cash would barely cover the cost of getting a financial plan in place.
So what is to be done? Martin Lewis has done a great deal with MSE but he doesn’t do pension and there’s no pension aisle in the Money Supermarket!
The answer has to be to use the existing resource within pensions better. I see brilliant people in MAPS, many insurers still have excellent customer facing teams and technology can be used to direct people towards these centres of excellence.
Martin has also shown that it is possible to build a “big beast” as he calls MSE, on revenues that do not cost consumers money but make the existing system slicker. Technology is a big part of this.
Perhaps the biggest challenge facing us now is to develop a commercially sustainable support network for people taking decisions that has the courage of its conviction.
You can build a ‘big beast’ when you sell insurance (car, home, pet, life etc), or cash accounts, or credit cards! Those are transactions where price comparisons are dominant.
Financial advice is a lot more complex than that. As Baroness Altman explains, legacy pensions are complex. Getting information on them is time consuming, expecially when dealing with legacy life offices.
The value of the service is in the behavioural changes we manage to educate our clients. That means getting them to plan, getting them to comply with the plan (accountability), getting them to understand investing, and to stay invested in moments like COVID-19. You will be surprised how many people have changed the funds in the workplace pension recently! Got a call on Friday from a prospect, who is a pilot and who moved all his money into the cash fund two weeks ago. Markets go down because people are selling!
You can create the best investment pathway, however you cannot get people to follow them! That is the challenge.
great post Eugen
I would echo Ros’ points about identifying special features in older pensions. But this is where the regulator has their focus so terribly wrong. There is such a focus on regulating advice when the major problems consumers face are from bad products and awful promotion and presentation of products. Why do the FCA not get given and then take responsibility for properly regulating products and product literature? It is not hard to confirm those products which have the following : Guaranteed Annuity Rates, protected tax free cash, GMP, MVRs, other Transfer penalties, guaranteed growth rates, protected retirement ages. It is simply beyond the pale that product providers and occupational pension trustees are allowed to get away with prevarication in this area. And we need to stop giving retail customers such a wide range of permitted investments for regulated products. If people want to invest directly in equities which are not listed on major stock exchanges, or any of these esoteric investments then they should do so without tax relief and outside pensions. If it were simply illegal to allow such esoteric investments inside pension wrappers then you could make it a criminal offence for SIPP providers to offer such shite. I have no problem with people having the right to invest in whatever they choose to. But they should do so without any financial services protection. Caveat emptor needs to apply if they want to invest in non standard products. Small SSAS schemes should no longer be allowed to invest more than a small proportion of total assets in property, this is just an abuse of tax relief. No one can blame businesses and business owners trying to minimise tax and minimise the costs of running their business by using their pension funds to buy their business premises. But why are governments so weak to let people use pensions for this purpose? Sorry to rant but advisers would not be able to suggest some of the shite they recommend if they weren’t allowed inside pensions in the first place. Consumers have the potential to be hoodwinked because of the amount of dodgy High risk assets that are currently permitted. By allowing so many unusual assets to be permitted inside pensions and ISAs it simply amplifies the potential for consumers to be scammed.
I agree with most of the comments above and they confirm that myself and others were right to highlight the problem of the ‘advice gap’ following RDR
I have written about a step by step advice process, the importance of behaviour and the value of advice. In short, financial advice is perceived as being complex and expensive and it is.
How do we make it less complex and less expensive? The answer must be to create a level playing field and subject everybody to the same rules.
I am still surprised how many people don’t realise commission is still payable on non-advise sales, online advertisements for financial products tell blatant lies and some websites are positively misleading.
IFAs are over regulated while many online sites are in the wild west!