I can be a little dull when it comes to Financial Services, but it’s been an interesting news’ week.
All those changes that you’ve been reading about in the press over the past few days, weeks and months? Well they’ve hit us and the banks and other financial leviathans have finally decided to tell the world what they’re planning on charging their clients.
For background, these “RDR” changes forced a move that we, as a firm of fee-based Financial Planners chose to make when we first set up in business. It is deeply worrying (but unsurprising) that the banks, and St James’s Place, who have a vested interested in both opaquely charged commissions, and pushing their own (frequently expensive) financial products, have waited so long before showing their hand.
So what does it all mean?
I actually think it will be some time until we see the true effect of these changes, for reasons that will be come apparent in the explanation below. RDR seems to have been implemented differently for the banks and St James’s Place – I particularly focus on these firms as they are the largest providers of their own products in the UK – basically the last remaining direct sales forces.
For clarity, there’s a big difference between an Independent Financial Adviser or Financial Planner, and a firm that can only recommend its own products. The former should be interested in you, and what’s best from the whole market – even if this means no action; the latter likely needs to push something to earn money – even if you don’t need it.
Each bank has a slightly different fee structure, but these are not the only charges you’ll pay. In essence, these fees, in many cases, will simply be to put a proposal to you. A proposal which is to invest in more of the bank’s products. These have their own fees attaching, and make separate profits for the bank. The FSA have said they will take a dim view of these companies offering advice on the cheap only to subsidise entry into expensive products. I remain cynical – we only need to look at the level of Payment Protection Insurance claims, and how the banks can advertise ‘commission free’ currency, with a 10% spread between the sale and purchase price.
If we compare this to our firm, we also charge initial fees to build a proposal (which, for reference, are almost universally less, on a like-for-like basis); but we recommend investments and pensions which are competitive and appropriate from the whole market. There are rarely any other additional establishment fees, and it is in our mutual interests to use our bargaining power as one of Surrey’s largest firms of Independent Chartered Financial Planners to negotiate the best ongoing cost for our clients.
Of course there are other considerations than cost, but in an uncertain world, it is one of the few aspects we can control.
St James’s Place
We rarely encounter St James’s Place, but it is interesting to see their approach as one of the largest direct sales forces in the UK. To their credit, their fees are more transparent than most of their peers, but boy are they expensive! It seems likely they will also insist on trying to give the illusion their upfront cost is zero with by investing 100% of an individual’s money, and applying high costs and penalties in the early years:
- Initial charge: 4.5% to 5% for most investments
- Ongoing charges: 2.1 – 2.3%
That doesn’t mean much without context, but based on our average initial advice charges in 2012, their initial fees are nearly triple this firm’s. Whilst our clients differ, and not all elect for the cheapest ongoing option, those that did would see ongoing costs less than half St James’s Place’s!
Independent Financial Planning Advice, focused on you, and your objectives is often cheaper than advice from direct sales people. Additionally, advice from a direct sales person is less likely to be in your interests. Above all else, would you not rather understand if you’re on track to achieve the things that really matter to you, than line the pockets of a salesperson with targets to hit?