It’s hard to underestimate how frightened the financial advisory community is over the decline in St James’s Place’s fortunes. For years IFAs have moaned about the collateral damage SJP’s high charges are doing to their reputation. But when SJP’s fortunes crashed, it appears to have shaken general confidence.
SJP’s issue was not delivering ongoing services to clients paying ongoing fees. Or more specifically, not being able to evidence they had done so prior to 2021 when they implemented their new customer relationship management system.
The fear for many advisers is that they do not keep the detailed timesheets to demonstrate time spent with clients, this is what actuarial and legal practices do, billing clients based on time-spent and being able to justify value for money spent against fees charged.
These complaints against St James Place Wealth Management relate to advice and service, not the administration of the products purchase. The provision against these complaints in SJP’s most recent financial statements are ominous not just for SJP but got the wider UK wealth management industry.
There are two parts to the story around St James’s Place and ongoing advice.
Firstly, there is what’s happening to SJP itself. Secondly, there is what might happen in the wider advice sector.
For SJP we are reasonably far down the line. It has announced a £426m provision for potential client fee refunds, but unless we see any further regulatory action, that will probably be it. The damage to their share price has been done though (over 66% down in last year) and will be long lasting.
As yet , there is little contagion from SJP to valuations of rivals
A bigger second story?
According to FCA data, 77% of advice sector revenue comes from ongoing fees, so any regulatory pressure on this revenue stream will be very “disruptive”.
But IFAs cannot move to a time cost model without decoupling fees from assets under management (what are known as “ad valorem”)
In theory such decoupling makes sense, the link between the value of financial advice and the value of a client’s wealth is tenuous, fee charging on a time-cost basis is transparent and intuitive to clients.
Decoupling or “unbundling” advice from wealth management fees presents three difficulties
- Collection– unlike other professional practices, IFAs who charge “ad valorem” do not need to invoice with documentary evidence of work done, they can instead use their investment management platforms to pay agreed amounts by deductions from a client’s wealth
- Tax– the client’s tax exempt fund pays the fees, the fees are therefore tax-incentivised and discounted to the payer’s mind. And unlike the fees levied by other professionals , they are currently not subject to VAT
- Record keeping; moving to a time-cost model requires a change in working practices akin to a cultural shift for many firms. While time cost is in the DNA of many professionals, it is not for most IFAs
Any customer has a level of fee tolerance that cannot be exceeded. The pressures on price from changes to working practice and more importantly, the loss of tax breaks will be the more commercially damaging if advisers have to directly invoice advice fees.
The worry for smaller advisory firms is that margins reduce as they struggle to deliver more for less. The worry for the FCA is that its pressure widens the advice gap and makes advice less accessible to the mass affluent.
The FCA and Value for money
This pressure is already starting to be felt. Last month, the FCA sent out a survey on ongoing advice, which went out to around 20 of the biggest advice firms . There are rigorous questions on ongoing advice fees related to fee structures ,levels, suitability , recording systems and management information). The answers to these questions will form part of the regulator’s retirement income advice thematic review. The results of this review are due before the end of Q1.
The output from this thematic review is seen as a big moment for the wider advice sector. This is the FCA’s chance to confirm just how much of a problem the regulator has with ongoing advice fees.
Large advisers fear two probes from the FCA. Firstly, are they like SJP in not delivering promised service? This is a quantitative assessment which should get a binary answer.
The second aspect is less cut and dry. Consumer Duty means it isn’t enough to simply deliver these services. You need to evidence that they represent fair value. This is more than quantitative and cannot be answered with a ticked box.
IFAs rely heavily on subjective assessments of fair value from their clients with 90% satisfaction levels reported across the sector. If the FCA see SJP as a model for what will happen elsewhere, this could have serious implications for the financial models of wealth managers and for the Professional Indemnity insurers who are the last line of defence before the Financial Services Compensation Scheme.
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