Putting a price on financial advice
Consumers pay for financial advice.
The myth that “advice is for free” has grown up off of the back of a commission based system of paying for financial products.
Blame the Banks if you like as just about every branch that you might visit will have someone offering a free financial review (what nonsense!).
What on the surface might seem to be “free” is in actual fact a cost paid by the consumer from product charges. I am not going to argue that it is not a convenient way to pay for some but only if you want your advice “bundled up” with a product solution.
JP Morgan Asset Management is recognised for providing some incisive insight into the retail financial services sector and they have done so again with the publication of their document Adviser Charging: Putting a price on financial advice.
From 1st January 2013 advisers will no longer be able to be paid commission by product providers in respect of the investment and pension plans that they might recommend to consumers.
Instead they will have to agree with their clients in advance of any action the price that the client will pay for the services provided. Those services might be advice (or financial planning) or implementation or review services or indeed a combination of all of these things – but the cost will no longer come from commission.
That is not to say that consumers will ‘have to pay fees’; this a new myth born out of reluctance that some financial advisers have to disclosure of the cost of advice and implementation services.
Adviser charging will still allow the cost of advice to be deducted from the product solution so in the vast majority of cases the client will not be writing out a separate cheque for these professional services.
Adviser charging may not be a perfect method but what we like about it is;
· It is transparent – the consumer knows exactly how much they are paying and what they are getting;
· It removes product bias from the system;
· It is documented and the consumer can judge whether it is value for money or not.
The abolition of commission is seen by some as a barrier to the provision of advice to the ‘mass market’ but this view is in my opinion skewed.
Over 50% of the UK adult population do not engage with an adviser.
Delivery of advice to those in the market who engage is already too expensive and takes too long (the Association of British Insurers has calculated the average cost of one piece of advice at £670) and the outcome is far from certain (read the Final Notices from the FSA to establish how often it goes badly wrong for the consumer).
We are often accused of having a vested interest as a firm because we have already (since 2004) adopted adviser charging as our pricing model and achieved corporate Chartered Financial Planner status. So as far as is possible we feel ready for the Retail Distribution Review.
But this accusation is simply wrong. If we had a vested interest it would be for the RDR not to proceed that would enable us to continue to look very different from the majority. Now that would be a competitive advantage.