So much for simple and transparent advice fees

I was excited about 2013 in all sorts of ways. And while I know it isn’t the kind of thing that gets everyone going, the implementation of the Retail Distribution Review (RDR), under which advisers have to charge transparent fees for investment advice rather than take commissions, was top of my list at the turn of the year. Finally, I thought, people will be able to visit their bank or their adviser and know exactly what it has cost them to walk through the door.

So far it isn’t going that well. This week MoneyMarketing released a list of the various ways in which their research suggests the big UK banks are going to charge people for taking their (all too often worse than useless) advice from now on. I’m going to try and run you through some of them. It isn’t simple, so I apologise in advance if the next few paragraphs make you feel brain addled.
 
Here we go. Lloyds is going to charge you 2.5% of the value of your assets on the first £300,000 of your money they give advice on. That drops to 1.5% on the bit between £300,000 and £1m and then to 0.75% on the following million. Anything over £2m incurs no obvious extra charge.

HSBC is going for a flat charge of £950 on assets up to £75,000 (so 1.9% on £50,000), then 1.3% on the next bit to £150,000; 1% to £500,000; 0.8% to £1m; and 0.65% to £3m. This isn’t tiered, so you get charged the relevant rate on the lot rather than different rates on different bits. There is also a flat £499 fee for anyone who has a consultation but then takes no action.

Nationwide is planning on creaming off 3% of your money regardless of how much you have, and following that up with a 0.5% “adviser charge” every year.

Finally, RBS has a similar sliding scale to HSBC but is on to the “adviser charge” wheeze too. For good measure, they also chuck in a £500 “plan fee.”
 
Right, so what does all this mean? And more importantly, what does it actually cost?

Let’s pretend we have £200,000. We go to Lloyds and invest in the stuff they suggest. That’s £5,000 (2.5% of £200,000). We go to HSBC: that’s £2,000 (1%). Next is Nationwide: £6,000. Finally, there is RBS: £3,000 (£500+£2,500).

Are you stunned? I am. And this, remember, is before you take into account the ongoing advice fees. You don’t have to take this option, of course, but if you see an adviser at, say, RBS it is hard to see him suggesting otherwise.  There’s another £1,000 gone.
 
Then there is the question of where all this expensive expertise might suggest you put your money. Odds are they’ll have a soft spot for funds run by another part of their business. So you’ll get to pay those fees to the bank too. Let’s say you end up in funds with total costs of 1.2% a year (this, by the way, is a generously low estimate on my part). There’s another £2,400 gone (assuming your adviser doesn’t suggest you use the money to pay down your mortgage instead of course).

So if you had gone to Nationwide, taken them up on their kind offer of ongoing advice, and bought average funds you would have paid a total of no less than £9,400 (I say no less because I haven’t even started on platform fees here…) by the end of the first year in their care.


 
There’s good news here, in that at least if you concentrate and have a Casio fx-85GTPlus calculator to hand, you can figure the costs out. And in the end, you will know what you are paying.

But in the main these charges aren’t good news. Why? First, because they are too complicated. The architects of the RDR were, I think, rather hoping that banks and advisers would take a accountant-style view on what their advice is worth per hour (or the price the market would bear per hour) and just tell everyone what that number is. Then the likes of you and I could just give them a ring and have this happy conversation:
 
“Hello, could you tell me how much you charge for financial advice?”
 
“Certainly madam, £150 an hour”
 
“Thank you very much.”
 
Instead, when I called the customer services departments of all these banks, not one employee was able to answer my question. One told me that “we don’t charge for investment advice” and all the others had to go away and check one complicated detail or the other. Oh dear.

The second reason all this is bad news, of course, is that these charges are just too high. Advisers will tell you that it can take 10-15 hours to figure out a new client’s financial needs and that ten hours of time doesn’t come cheap.

They may be right about the time these things take (although I feel the need to point out that in one of the exams advisers have been taking in order to be allowed to continue to operate under RDR they get more like 75 minutes to complete the client case study). But even at ten hours you are hard pushed to get anywhere near most of the fees the retail banks appear to be after.
 
The financial services industry has been used to making super normal profits for many, many years now. When we study economics, we are taught that super normal profits always get competed away. However, this is not an industry prepared to accept such text book results.

Faced with a system designed to create the transparency that will allow competition, they have set to work to confound it. And so we have something that should be simple and value orientated (“£150 an hour, madam”) being expensive and complicated.

I had hoped that 2013 might be the year in which the industry started to regain the trust of the consumer. There are new armies of newly trained and competent independent financial advisers out there who I think would like to give it a go. It’s a shame the big banks can’t consider joining them in working with the spirit of the law for a change.

• This article was first published in the Financial Times

  • Clever With Money

    I suppose we should be surprised that, after six years to prepare, the banks should still be so unready for the RDR but, as an IFA, I’m delighted. Why anyone would want to pay the sort of fees you’re quoting for (generally) restricted advice I’ve no idea.

    Of course, there’ll be some debate over what is deemed to be ‘advice’ and who is an ‘adviser’. I called into the Post Office recently to set up a savings account (it was the best of the feeble rates on offer at the time) and was introduced to the Financial Specialist. She was able to show me a flowchart and expected me to pick the right account for myself – some specialist, eh?!

  • JC

    But learning, training, education, experience and advice DOES cost money.

    As far as source advice goes, I’ve known lousy, ‘greedy’ IFAs and decent ‘restricted’ advisers and plenty the other way round too. Some advice is better than others. Same with plumbers, doctors and accountants.

    Furthermore, under RDR, advice firms have to prove viable financial independence as a business. They have to prove they are profitable or at leats they break even. They have to stand on their own feet away form their parent or associated firms. They will charge then.

    Also, frankly it seems that most of the time spent in giving ‘advice’ is in justifying that advice to Compliance and the FSA, the mechanics of which can be anything but simple, cost effective and transparent. It’s that Justification which now seems to take most of the time and costs the money not the ‘advice’…

  • Natalie Miller

    If I’ve read this properly, it only costs £650 to train as an FA with the institute of Financial Services to the required level 4:

    http://institute.ifslearning.ac.uk/Qualifications/QualificationsinFinancialAdvice/DipFA.aspx

    Better off training yourself than going to some other overpriced muppet.

  • SimonS

    Regulating advisers and what they charge is a waste of time and money, it hasn’t worked for 25 years and will never work. The solution is simple, the products need to be regulated and simplified and we need to teach personal financial planning in our schools. In thirty years this is what will have happened, for now we have to put up with the twisting and turning of the twistyturny things.

  • GPS MacPherson

    What worries me, is that these fee structures still seem to be based around, and reliant on, product sales and implementation, rather than actual advice. Appears only HSBC are making charges for consultations which lead to no products being sold to the client?

    I had rather hoped that the RDR would encourage advisers to move towards actual advice rather than just product implementation…

    To be fair to the banks, this isn’t a problem which is unique to them.

  • James Masters

    Good idea, Natalie. Does it enable one to be registered as soon as passing the exam? Then you can buy funds at institutional rates.

  • Vernon Halsey

    I suppose the banks feel they need to charge so much so that, once the PPI mis-selling scandal is finally resolved, they will have a fighting fund for the “RDR mis-selling scandal” to come!

  • jimtaylor

    “Faced with a system designed to create the transparency that will allow competition, they have set to work to confound it.”

    This is the nub of the problem and it is a dsgrace that after all that has been said about RDR that the institutions cream off so much for nothing more than basic salespersons in so many cases.
    The other problem is that so many hard-working people are too busy to find out how to do things for themselves, but increased transparancy might start to help show it is worth spending a few hours to save on fees.

  • Simon H

    James: unfortunately you would also have to register with the FSA this costs about £3000 to £4000 per annum. You would probably need PI insurance too which is a similar amount.

    What Natalie also misses is that the course requires approx 300 hours of study which needs to be costed too! Plus the cost of any retakes if you fail any section.

  • alec

    Why on earth would anyone go to a bank or a building society for financial advice. They have shown over the passed ten years that the are incapable of running their own businesses and also have engaged in massive frauds, money laundering, rigging libor and left the tax -payer to pick up the bill and save them from bankruptcy.

  • 4caster

    Is it really beyond the wit of regulators to insist that Financial Advisers are truly independent, i.e. totally separate businesses, distinct from any financial institution that manages funds and deposits?
    Surely any adviser who draws a salary or any other emolument, from any party other than the customer, has by definition a conflict of interest.

  • Orb

    It seems logical that when you are forced to restructure your business model you will try to price any lost revenue streams into the new model.

    Comparing fees of your typical IFA, these new bank fees reflect just how much banks were fleecing/defrauding unsuspecting victims by flogging their worthless ‘investment vehicles’ (e.g. the sub-prime frauds Goldman sold while themselves betting AGAINST them!)

    A personal experience saw me accompany a friend to a meeting with a bank FA just before the 2008 crash in which the FA recommended I become an FA myself! She revealed basic pay – before bonuses – of around £90k!!! – And I was telling HER about the state of the markets!!!

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