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.
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