Expert: Blair Anderson, Dimensional Facilitator: Richard Clarke
Headlines:
- Price is what you give to a client, value is what you get as a client
- The average fee per client is £2,500 and 78bps of Assets under Advice
- The FCA is increasingly looking at net promoter scores as a source of evidence on whether clients are getting good value from their IFA firms
- There is a lack of competition in the sector – clients tend not to shop around for cheaper prices when it comes to advice
- Fixed fees for certain pieces of work may be transparent but they ignore the liability risk that goes with higher case values on which advice is being given
Context:
The FCA Consumer Duty’s focus is on pricing and value, ensuring it is fair and reasonable.
Dimensional surveyed 15,000 firms globally including 3,500 in the UK and found pricing is largely consistent across the Western countries.
The roundtable consensus was that the FCA won’t be determining prices, but will expect firms to document how prices have been derived using clearly documented policies and possible rate cards as a basis of fair value justification.
When it comes to how firms arrive at a price point, the roundtable had a range of views, from: guesswork; working back to an hourly or fixed rate needed for the firm to achieve a certain profit figure; and adjusting the prior year’s fees for anticipated changes in workload on a client-by-client basis.
The objections to hourly rates are that clients pay for skills, not time, and small firms do not have a timesheet system to accurately log time spent on each case file. They also lack the resources to gather and analyse data and therefore may make too many erroneous assumptions in any modelling to establish an hourly rate.
The hourly rate ignores value add, which is of more interest to clients and different hourly rates are needed for different levels of staff skill and experience (e.g., adviser, paraplanner, administrator etc).
Also, traditionally lawyers and accountants charged hourly rates but now they are moving to value billing as this can be more lucrative as well as being fairer to clients than time-based billing, which makes it hard for clients to manage their fee expectations.
Is the FCA trying to focus on price/value because there are more PE backed consolidators who seem to be focused on driving up profits, rather than fair pricing for customers? The roundtable consensus perception is that very few firms over charge, and the FCA may be looking into this area to root out those outlier rogue firms.
How will the FCA know if clients are being overcharged, if there is no benchmark data for it to look at? Is this going to form part of the annual FCA questions of IFA firms?
Will the FCA look at overall pricing, not just the advice component of on average 78bps, which ignores platform fees averaging 24bps and fund fees which average 89bps?
How will the FCA objectively look at service and value, rather than price?
Key takeaways:
- Value is benchmarked through client satisfaction levels and the number of client referrals
- It is important that the FCA continues to let firms make commercial decisions to charge different fees to different clients. Taking relationship context into account with flexibility to have discounts to standard fee rate cards will be critical in that regard
- When asking clients for feedback, rather than general questionnaires, it is better to ask for specifics about level of service
- When clients evaluate how happy they are with their adviser, they focus on peace of mind and the sense of financial security the IFA is providing, rather than fees paid
- Firms measure value from their clients’ perspective through client referrals, while some use client feedback as an objective measure of client satisfaction. None of the roundtable firms use net promoter scores
