Advisers are investing significant money and time into meeting Mifid II requirements that require them to set out to clients how much they are paying for investments, and how performance affects this.
New Model Adviser® heard from St James’s Place (SJP) and Quilter, two of the biggest advice firms in the UK, about the work they have put into meeting ‘ex-post disclosure’ rules, which came into effect under Mifid II last year.
Ex-post disclosure requires every advice firm to write to all of their ongoing clients by April 2019 with a complete breakdown of what they are paying for. This will then become an annual requirement, making it important advisers put processes in place to ensure they can repeat this exercise every year.
Not only do the rules include setting out costs in pounds and pence in the letter, but also mean advice firms must tell clients how the charges are affecting the returns they are getting from their investments.
As New Model Adviser® reported last month, the fact letters will be landing on clients’ doormats just after the most difficult time for markets since 2009 could lead to difficult conversations with clients when it comes to discussing value for money.
Many have suggested clients will question why they are paying advice fees when performance is poor. But research conducted by NextWealth managing director Heather Hopkins suggested the problem facing advisers when clients receive their ex-post disclosure letters may be their association with the investment chain, rather than their own charges.
‘I often hear from advisers that they do not get pushback on their own fees; it is the other fees they get questioned on. I did some qualitative research with investors earlier in the year and the perception was that their relationship was with the adviser,’ she said.
‘So they did not think about fees in terms of what went to the platform, what went to the asset manager and so on. The whole pot of fees was associated with the adviser, and they were responsible for making sure those fees were reasonable.’
Ben Goss (pictured), chief executive of advice technology provider Dynamic Planner, said advisers who tied their value too closely with investment performance are already getting into trouble.
‘Advice firms are telling us they are having to have some really difficult conversations now because the stack of charges is so much clearer and many portfolios have gone down over the past 12 months,’ he told New Model Adviser®.
‘The client is earning less and what they are paying is clearer. In that context, you have to position the value the review delivers. It’s not just about investment performance, it’s about that as part of the right level of risk.’
What consumers want
The large national advice firms have dedicated extensive resources to this exact predicament. Quilter, for example, hired consultants Deloitte to conduct research into how clients reacted to being told how much they paid annually for advice, product and investment management in pounds and pence.
‘Deloitte showed advised consumers a generic mock-up of a Mifid II disclosure document that displayed a moderate fall (less than 5%) in portfolio value, and asked how they would expect to respond when they received them,’ Sarah Waring (pictured above), client and proposition director at national advice business Quilter Private Client Advisers (PCA) told New Model Adviser®.
‘More than two-thirds said they would want a more meaningful conversation and would be likely to “do some research on alternatives”, possibly for the first time, to try to understand the information better.’
For Quilter, this research raised a problem: those clients who were surveyed had little or no context and nobody explain this information to them. Waring said this pushed Quilter PCA to think about how involved its advisers were in the process.
‘It’s absolutely vital our advisers are able to articulate and demonstrate the value they add and champion the power of advice. To that end, we have supported them with seminars and training focused on the topic.
‘We have also created an online information hub with support materials and tools that help them define the value they provide and articulate that value against perceived cost.’
One example of this in action is Quilter PCA’s letter to clients discussing the new fee and performance reporting. This emphasises the fee report should be considered as part of a long-term picture, rather than taken on its own.
‘Please remember that any statement simply provides a snapshot of a relatively short time period and needs to be placed into context of the medium-to-longer-term journey. Where the value looks higher or lower than anticipated at a given point, it does not necessarily follow that it is not behaving in line with expectations.’
Other Quilter PCA materials also offer the context of the difference an adviser makes to a previously unadvised investor. This has involved research conducted in conjunction with consumer finance website Boring Money, which showed investing without advice can ‘cost clients dearly in lost returns and unrewarded risks’.
The research found unadvised investors suffer an average annual loss of around 5% compared with the risk-based, diversified portfolio an adviser would ordinarily recommend.
Quilter later plans to roll out a white paper complete with a ‘value of advice’ equation, based on academic assumption vetted by experts from Cass Business School and City of London University.
Waring added: ‘The paper and its equation gives advisers tangible and concrete proof of their value, by putting a numerical value on all the elements of service they provide.’
Goss said it was important to emphasise the value advisers have added when they contact clients about ex-post disclosure.
‘I think advisers undersell themselves actually. Things that we might consider simple, like keeping clients out of unregulated products, making sure fees and charges are accurate, those things are the job of a good firm. Providing a checklist of all the value you have delivered to counterbalance the cost absolutely makes sense.’
SJP has also begun issuing annual costs and charges statements to all clients holding products that fall within the scope of Mifid II. It has primed its partner firms to support clients with questions that may arise.
An SJP spokesman told New Model Adviser® the firm’s statements present charges and costs that clients have paid in relation to their ISA and unit trust accounts during the previous calendar year. All calculations are based on the actual charges paid in the reporting period, reflecting the actual funds held and any new investments or withdrawals made.
The statements show the investment value for each individual account held as of 31 December in the preceding year, the new investments made over the 12 months, and the values at the end of the statement year.
They also document initial charges on new investments, annual charges and transaction costs that have been paid in relation to accounts held, and the grand total of these charges and costs over the investment period. Each is presented in both pounds and percentage format.
SJP also includes information on how the charges and costs for investments held could reduce returns, and offers explanatory notes on how the figures are calculated.
For large firms, the biggest challenge of ex-post disclosure is ensuring they do not lose clients through poor communication, or from clients questioning why their fees can appear to be outweighing performance.
Given what is at stake, it is not surprising Quilter has invested time and money into working out the best way of actually communicating to clients. There are smaller firms that will have communicated annual charges and performance in line with ex-post disclosure for years.
They will have used their advantages as smaller businesses to build closer relationships with clients without the extra layers of compliance sign-off and management responsibilities that come with being a large advice firm.
Chance for redemption
But Mifid II could be a wake-up call for larger firms such as SJP and Quilter to replicate this model. SJP in particular has been criticised in the national and trade press over the transparency of its charges. Ex-post disclosure could be the moment it starts to address these criticisms.
Or perhaps they will take a different approach. The SJP spokesman emphasised it may have a different approach from other advice firms when it comes to meeting the ex-post disclosure requirements.
‘It’s worth noting the Mifid II rules are open to interpretation, so there will be some differences in how they are applied by different firms,’ he told New Model Adviser®.
Without any precedents it will be hard to know for several years how successful Mifid II has been in protecting consumers. At the very least, though, it will force big firms to confront their charges and how they present them head on.