Consumer Duty and the race to the bottom

Published on 8 April 2024 at 12:57

On LinkedIn, I picked up a financial planner who quoted the table below to lambast the likes of SJP in terms of their fees. At the same time, they praised their fee structure. This has made me think about Consumer Duty and the “Fair Value” aspect.

What is “fair value”

 

There seems to be some confusion surrounding this. Many seem to see this as a drive from the FCA to push charges down.

 

Based on my conversations with the FCA, this is not the case. I flippantly suggested to the FCA that, in theory, they wouldn’t mind me charging a client 10% a year as long as I could articulate my proposition, evidence this was being delivered and offered fair value. You could argue that if I was a miracle worker and my proposition delivered a return net of my 10% charge, say 10% a year, that is fair value.

 

As our conversation went along, the reality was that it would be tough to justify that level of fees. But the point is that this is not just about the level of fees that someone takes.

 

SJP has made some mistakes recently, but you must ask how they have grown into the beast they are today. There will also be many pleased clients who perceive that they are getting fair value.

 

Switching back to the individual on LinkedIn, I went to their website. Their starting fee is £6,000 per annum. It is not rocket science to work out that unless you have £1 million plus, they are just not interested. This highlights the stark reality of the dangers of focusing on price.

 

Clearly, this firm can make money. Assuming all clients are paying the base fee, the firm receives at least £2 million in fees a year. The reality is that this is probably double. They talk about investors with £100,000, but this is not their market.

 

And this is the crux of our situation. There is a belief that “fair value” means lower prices. They are targeting clients with £1 million plus (I suspect it is higher), and by doing this, they can claim their percentage fees are lower. But in doing so, they are cutting out a massive market segment.

 

As financial planners try to drive down costs, they realise they must target those with more money to reduce their charges. This means we are seeing this creeping towards only looking for clients with £250,000 to £500,000 plus. This is a table from NextWealth.

 Financial Adviser or Financial Planner

 

The UK seems to have entered a chaotic phase. Most Financial advisors (unless they are part of the banking system) now call themselves Financial Planners. The problem is that the transition from Financial Adviser to Financial Planner is difficult for some.

 

A generation of financial advisers/planners missed the period of “selling” a product and then just left it and took an ongoing commission. For others, the investment aspect was much easier to articulate.

 

However, financial planning is more about the value that a planner brings. Of course, investments are part of that, but this is about formulating a plan together, going on a journey together and utilising the most tax-efficient aspects of the financial market. For some, articulating that message is challenging.

 

A financial planner should be able to charge a fair fee, whether upfront and/or annually, and if the proposition is explained well, most people will be happy to pay that.

 

I believe that an actual financial planner will add value.

 

The state of the UK market 

 

Whilst financial planning firms fight and lambast the “opposition,” they forget that “they” are all in this together. This is not us and them. Whether SJP charges a massive fee (in our humble opinion) or whether a firm excludes an enormous market segment to make the fee look cheap, it doesn’t matter.

 

What concerns me is two-fold. The first is demonstrated below.

The age profile is getting older, and with private capital awash, it is attractive to sell a business and disappear into the sunset! There have been a handful of well-run acquisitions and mergers, but in the main, the only winner is the person selling the business, not the clients.

 

The clients end up in a homogenised proposition that is nothing like what they had signed up for. Ultimately, they will be worse off; the other aspect is that when private capital is involved, there is only one outcome down the road: the clients will be sold on again!

 

While this infighting continues, it doesn’t become an attractive environment in which to work.

 

The lost generation

 

The second aspect is demonstrated in the chart below from NextWealth. This shows that only 11% of annual revenue comes from new clients. Financial planners are moving away from new clients to servicing what they have. This makes sense as they narrow the target market to the higher value funds.

 

The FCA wants to offer open advice for all, but it is becoming clear that firms must exclude clients from their books as they focus on price. It would not surprise me that in the future, unless an individual has £300,000 plus to invest, they will not be able to get any advice.

 

What gives me hope is that a small number of financial planners are targeting the £100,000 plus market. Yes, they charge an upfront fee and a higher annual fee, but they seem to be able to find a willing market.

 

The future

 

Consumer Duty and Fair Value are not about price; they are about the proposition. If a practice can articulate this well and demonstrate that this is fair value, then price is irrelevant.

 

While the industry criticises other firms, it indicates insecurity within their business. As a sector, they should be pulling together. There are plenty of opportunities to help and work with individuals seeking advice.

 

Suppose firms reach a point where they have had enough and are tempted away by these big behemoth consolidators. In that case, the only winners are the directors who take the money and the consolidators when they eventually sell out.

 

Firms must focus on their proposition and understand their target market to survive and grow. There should also be more about encouraging young people to enter the industry. And finally, technology should also be embraced and not feared.

 

In summary, I fear that Consumer Duty has created confusion where financial planning firms feel they must reduce charges and exclude specific clients by its very nature. This was never the intention of the FCA.

 

Rather than focusing on charges, focusing on the proposition may deliver a more sustainable business. If this doesn’t happen, the losers will be those seeking advice.

 

Disclaimer: Please note these are my thoughts. There are no recommendations within this. I am not regulated, nor can I provide advice. I would always recommend seeking advice from a financial planner before making any investment decisions. Investments can also fall and go up, and past performance is no guide to the future.

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