Assessing the complex concept of ‘value’

Financial advisers occupy a unique and powerful position in the value chain, writes John Bennett. Here he explores the concept of ‘value’ and says pricing disruption looks a dead-on certainty

The Retail Distribution Review was the starting gun in reducing costs for investors, and MiFID II has had a profound impact on cost transparency.

Nowadays, we have full, multi-level cash disclosure, which has come as a bit of a shock to many clients – particularly those with larger portfolios.

Asset-based fees are finally coming under greater scrutiny as a result. The cost of administering a constant number of investment holdings doesn’t scale proportionately, and larger clients inevitably end up subsidising smaller ones.

But cost is not the only concern for investors and for the regulator. Value is increasingly being called into question across the industry too.

It all comes down to price for clients while advisers are now expected to justify a raft of third-party costs which they aren’t, in essence, directly responsible for.

This is because advisers are a value gateway. The choices they make in terms of platform selection, DFM selection, fund selection and asset selection directly impact client outcomes, and clients now have visibility over the costs associated with bringing about those outcomes. A regular review of what’s on offer, especially in times of price disruption, is essential.

Talking about money is an issue we Brits have constantly struggled with, but if you are offering a truly value-led proposition, price should be front and centre of the discussion.

In the FCA’s Assessing Suitability Review in 2017, we saw a whopping 93.1% of the adviser community pass the suitability test, while just 52.9% passed on a cost disclosure basis. More recently (January 2020), a ‘Dear CEO’ letter from the FCA raised concerns about significant harm to consumers’ financial well-being, specifically mentioning excessive fees.

Research by the lang cat earlier this year found that traditional percentage-based pricing on centralised investment propositions used by 82% of firms disproportionately penalises clients. It simply does not cost 10 times as much to run £500,000 under a model portfolio service as it does to run £50,000.

The consultancy also found a large degree of price clustering with 86% of the advice market pricing around the 0.5%, 0.75% and 1% mark, suggesting an uncompetitive market. The regulator will undoubtedly be taking a closer look at this in the future.

Value is in the eye of the beholder

Value is a complex concept. Advisers provide a range of services, many of which have no link to the size of a portfolio: researching, coaching, planning and collaboration with third parties to implementing the advice, reviewing and reporting. This is all part of the generic offering and requires a lot of time, with only a minority spent on actual product delivery.

At the same time, financial advisers occupy a unique and powerful position in the value chain to source services on a best value basis and thereby contribute meaningfully to their clients’ value proposition.

Now, more than ever, clear articulation of adviser value is vital. So, what does good value look like? If the equation for value is quality and service over price, it’s important that what clients get is explained in detail and that price is differentiated from the crowd.

Differentiation is the keyword here. A perception of good value is hard to achieve on performance and service alone, especially where many can claim similar outcomes. Price differentiation is a clear opportunity to me, especially in a market with a dominant, flawed pricing methodology.

An increasing number of advisers we speak to either have or are planning to move away from percentage AUA pricing or are reviewing its scope.

What does the future hold?

The FCA’s Assessment of Value measures introduced in 2018 has already resulted in the closure of several legacy share classes and underperforming funds. It is to be expected that the regulator will continue to tighten its grip in this area.

Adviser charging is in the melting pot too. Initially, the FCA has targeted pensions, but this focus is likely to spread. As the FCA observes: “Ongoing advice charges create a conflict of interest, as an adviser may have a strong monetary incentive to recommend one course of action over another… Over time, these charges can have a significant negative financial impact on the consumers’ transferred funds. Our view is that many consumers would not benefit from ongoing advice as their circumstances are unlikely to change significantly from year-to-year.”

In short, the regulator could not make it any more obvious that fees are under the microscope industry-wide.

What’s to be done?

There’s a good argument for the costs associated with financial planning and those related to advice and execution to be separated.

Research earlier this year from the lang cat showed the likelihood of disruption across three areas of the market, in terms of proposition and pricing and the impact that might have. Pricing disruption looks a dead-on certainty and respondents clearly believe its impact will be significant.

Source: The lang cat: Better, Stronger, Faster

What is clear is that none of us will escape these disruptive forces. It is now a feature of the market in which we operate and planning for them is a prudent approach.

John Bennett is head of adviser proposition at Sparrows Capital



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