Value for money is at the heart of the FCA’s thinking on the Consumer Duty and the FCA wants advisers to show that the advice they charge clients delivers value for the money paid.
But measuring value is a lot harder than measuring the money. Whether the money comes from a deduction in the wealth pot (adviser charging) or from directly billed fees, it is quantifiable and measurable. But the value of the advice is much harder.
Can an adviser prove that it was “advice wot done it!” when pointing to an improvement in a client’s financial well-being?
Or will the client claim that it was his/her money, his/her risk and that the value was created by his/her decisions?
Only where the client has signed a discretionary agreement that hands all decisions to the adviser, can advice be considered more than a factor in a decision. Where a discretionary agreement is in place, value for money looks to be measurable with the VFM framework being considered by DWP/TPR/FCA, is is a matter of outcomes and service.
For the most part, advice is charged for , as part of an ad-valorem or fixed fee. If ad-valorem, the fee is justified based on “means to pay” and the quantum of risk taken by the adviser (more risk of getting it wrong with £1m or £100,000 – a higher level of care required for the larger portfolio etc.).
But ad-valorem fees are commercial imperative for advisers. They ensure regular payment and allow their businesses to be easily valued when they sold.
Like most people, I accept this dodgy logic but prefer the idea of a time/cost approach where I get charged for work done rather than risk-taken or value-added.
Of course most advisers will , if asked, provide justification for the money they take based on a time/cost calculation which is scaled up to reflect the risks they take and the value they give. This tends to be a one-way calculation, advisers don’t rebate when they’re not taking risk or not delivering value.
The idea of not delivering value is tough. Advisers can’t be blamed for years like 2022, when there was nowhere to hide and almost all portfolios went down in value. Should an adviser be blamed for not investing in Ruffer, that produced a positive return (and not by being invested in cash)? Obviously not.
But linking fees to performance and claiming this aligns the adviser to a client’s interests, does beg the question “what does bad look like?”. Is there a benchmark agreed as part of the advisory deal, which if not reached, materially impacts the level of fees paid. Can VFM work both ways? I suspect that so long as asset managers can work on ad-valorems, so will advisers. We are a very long way from moving fund managers away from annual charges based on a percentage of funds under management.
Which brings me away from measuring outcomes to measuring service and here advisers have a very strong case to argue, one that I don’t see being made very well other than between themselves. Well not strictly true, St James Place has produced a really good 8 page document with some good information on why advised clients pay what they do. We’re using it as part of the work we do to justify the fees we charge to our customers and you can download it here.
The information is a little old and it’s courtesy of Boring Money’s research, (not SJP’s) but the framework is a good starting point for measuring the value of your advice
Boring Money continue to lead the way on this kind of measurement and offer advisers a bespoke service which it advertises as
A tool to measure whether you are providing good outcomes for your end-clients
Provides evidence to the FCA that your firm is taking steps to understand what advice clients value, and thought about how your firm is going to assess services provided against Consumer Duty principled
Independent stamp of approval from a third-party provider
Understanding what clients value advisors for and measuring concepts such as “peace of mind” “trust” and “planning” are subjective sciences that do not lend themselves to quantitative measures, but that shouldn’t stop an adviser creating a VFM framework and establishing benchmarks for what clients might reasonably expect.
Ultimately , it is the client who takes the decisions. You can have the best gym and charge top subscription fees – only for subscribers not to turn up. Where advisers offer an expensive service and it’s not used, should the adviser point out that a cheaper service be more suitable? This gets to the heart of the consumer duty.
Should an adviser offering little more than can be googled, but who is widely used, be criticized for a lack of proactivity and personalization? This too is a question of consumer duty.
Ultimately, advisers need to set out their stall for what they are. I have consistently argued that St James’ Place offers great value for wealthy people who want a service that makes them feel their achievement is valued. This is not me being cynical, SJP has become one of Britain’s great financial service institutions , a FTSE 50 company and it commands great customer loyalty.
But that loyalty can slip. I suspect that Allied Dunbar was telling itself the same things in the 1980s. The consumer duty is not a “one and done” test. “Advice is always changing”, conclude SJP and the value we place on it changes too. We need a framework for measuring the value of advice (as well as the money) and if the Consumer Duty creates one, it will have done a great thing.
Meanwhile, the Government imposed VFM framework for measuring the value we get from workplace pensions, provides the alternative. A state imposed measurement system, based on the interventions that have happened in Australia, would not be pleasant. Advisers have it in their own hands to avoid that fate, let’s hope they can create a common framework which commands the respect of regulators and clients.