When it comes to fee disclosure, the Financial Conduct Authority (FCA) appears disposed to focus on what happens to a client at the outset (historically associated with product sale), as opposed to considering the servicing aspect to a long-term client relationship.
In its recent Assessing Suitability review, the FCA was pleased to report that advice firms delivered suitable advice in 93.1% of the cases studied in 2015. However, in only 52.9% of cases was disclosure deemed acceptable.
This meant firms were failing to correctly disclose the total cost of ongoing services in cash terms or did not provide an approximation of how long services may take when quoting hourly rates.
This is easily solved by providing the client with an annual invoice, which would ensure full disclosure takes place on an annual basis and means clients can decide whether or not they have received value for money from their adviser.
Our experience at Hunter Aitkenhead & Walker has been that customers focus heavily on initial fees when they are considering using a firm’s services. These tend to be significantly higher than ongoing fees due to all the work involved, and any client who is fee-conscious is likely to discuss these costs at an initial meeting.
However, a focus on these costs is misleading. The reason for this is customers tend to be forgetful when it comes to keeping a mental note of what they are paying for ongoing advice. Some financial planners and companies are adept at burying these costs, so they resemble old-style trail commissions. Annual disclosure of ongoing service fees on a continuous basis would be one simple solution to this.
Last year we reviewed our fee structure and this resulted in an increase in ongoing fees. At our practice, these fees are a percentage of assets under management, with the percentage gently reducing as the amount the client has invested with us increases.
It quickly became apparent, when we started writing to clients to advise them on the increase in fees, that many customers did not really know what they were paying.
Our solution to this issue was to provide every customer with an invoice each year. This states the assets under management at their renewal date, the ongoing fees received from product providers and commission where certain legacy products are still in force. These are then compared with the fee due, based on the percentage rate we have charged over the year multiplied by the end of year asset value.
This leaves a credit or debit balance that is settled by a deduction from the client’s investments or sometimes a cheque directly from the customer. A credit balance is rolled over until the next invoice.
Ultimately, financial planners will charge on either an hourly or project-related basis. However, as we continue on our journey to this end point, providing the customer with an annual invoice can remedy the issue of initial disclosure.
Jim Aitkenhead is a chartered financial planner at Hunter Aitkenhead & Walker.