Traditional percentage-based pricing is being challenged, not least by investors with larger portfolios. Paraplanners are at the heart of the value discussion, so how can they help move the cost conversation forward? asks Mark Northway, investment manager at Sparrows Capital.
An estimated £180bn increase in the collective savings pot of UK households has been one unexpected silver-lining of Covid-19 induced lockdowns, according to the Bank of England.
Research from mutual Scottish Friendly and the Centre for Economics and Business also indicates an increased savings rate will be the new norm in the UK. They predict households will set aside 11% of their disposable income in 2021, down from the 16% Brits saved last year, but above the long-term average of 8.5% between 2000 and 2019.
With interest rates still on the floor, this should be an opportunity for the investment industry. But while many Brits ‘remembered how to save’ over the past year, preoccupation with the cost of goods and services is unlikely to disappear.
Continued economic uncertainty in a low-yield environment means a belt-tightening mentality is set to remain. And there is no reason to assume the cost of investing will escape scrutiny.
Moving on the cost conversation
RDR was supposed to be the starting gun in reducing costs for investors, and MiFID II had a positive impact on cost transparency. Nowadays, the industry provides better, multi-level fee disclosure, which has come as a bit of a shock to many clients – particularly those with larger portfolios.
But cost is not the only concern for investors and for the regulator. Value is increasingly being called into question too, and intermediaries are now expected to justify a raft of third-party costs which they are not, in essence, directly responsible for.
This is because adviser firms are a value gateway and the choices paraplanners make in terms of platform, DFM, fund and asset selection directly impact client outcomes.
This has always been the case, but now clients have direct visibility over the costs associated with bringing about those outcomes. So a regular review of what’s on offer, especially in times of price disruption, is essential.
Research by the Lang Cat in 2020 found that traditional percentage-based pricing on Centralised Investment Propositions used by 82% of adviser firms affects larger clients disproportionately. It does not cost 10 times as much to run £500,000 under a Model Portfolio Service as it does to run £50,000.
Value is in the eye of the beholder
Value is a complex concept. Advisers and their paraplanners provide a range of services, many of which have no link to the size of a portfolio: from research, coaching, planning and collaboration with third parties through to implementation, review and reporting.
At the same time, intermediaries occupy a unique and powerful position to source services on a best value basis and thereby contribute meaningfully to their clients’ value proposition.
A perception of good value is hard to achieve on performance and service alone, especially where many can claim similar outcomes. Price differentiation is a clear opportunity, especially in a market obsessed with a dominant, flawed pricing methodology.
An increasing number of financial advice firms we speak to either have or are planning to move away from percentage pricing or are reviewing its scope.
What should be done?
If investors are challenging the price they pay for advice and investment management, it may be time to revisit the composition of those fees. Are there other parts of the chain that can be addressed differently? If adviser firms are using a model portfolio service (MPS) for a portion or for all their clients, for example, they should assess what they are paying for it.
The reality is, while model portfolios provide a very efficient way of delivering a diversified portfolio mix for every type of risk tolerance or outcome, they are essentially ‘oven-ready’. If your company pays asset-based fees for clients invested in such a service you might want to question why.
Over the past decade, there is no denying the increased focus on the cost of investing. But nothing stays static. For advice firms then, it is important to stay appraised of the various propositions on offer for the services they pay for. Here, paraplanners have a vital contribution to make.