With platforms set to issue new cost and charge statements to investors imminently, Mike Barrett of the lang cat argues that now is a good time to review your processes to ensure clients are reminded of the value they receive in return for the fees they pay
“Price is what you pay, value is what you get”. Warren Buffett
When writing an article on value for money it’s pretty much the law that one of Warren Buffett’s favourite admonitions needs to be included at some point, so I thought I’d get it out of the way nice and early. I’ve never had the pleasure of Warren’s (if I can call him Warren…) company, so can’t be certain, however I’m pretty sure he wasn’t thinking of the minutia of MIFID disclosure when he first uttered this famous quote. However, MIFID and a few other bits of adjacent regulation are increasingly putting the whole question of what is or isn’t value for money into sharp focus. And for advisers, this focus is only going to continue.
When looking at the first part of Mr Buffett’s quote, price, MIFID has changed the game for investors. In most cases it is now reasonably easy to find out the cost of the services on offer, certainly if you are an investor working with a platform, asset manager and a reputable financial adviser. Advisers have been clear about their charges since RDR, and MIFID has forced platforms and in particular asset managers to come up to the same standards.
The price you pay
Central to this are the new MIFID cost and charge statements. By the time you read this, the vast majority of platform clients will have received a shiny new statement in the post, detailing all the charges they have paid in the last twelve months. This will include a total charges paid figure, then separate figures for advice charge, platform fee, asset management fee, and anything else that might be involved. This is what you pay, so investors will subsequently be able to decide if what they are getting is actually of value.
Making sense of the figures
For advisers, these statements create something of a challenge. The good news is that every platform will be sending each client a statement directly, so in theory advisers won’t need to do anything. The reality, however, is somewhat different. First up, not every adviser I speak with is entirely comfortable with the platform communicating directly with their clients. Whilst these letters can’t be intercepted, and will be sent, many advisers are wanting to provide additional disclosure and communications to the clients to help them understand what is being said.
And this is where things get really tricky for advisers, especially if you have clients across more than one platform. It will come as no surprise to discover that most platforms are approaching these statements in slightly different ways. Scope, timings, content, calculation methodologies all can vary depending on who you are using. The good news is that this is just the sort of detail we love at the lang cat (we don’t get out much…) and we have collated everything you need to know for every advised platform in the UK. Visit https://www.langcatfinancial.co.uk/publications/ and download the free guide to MIFID cost and charges to see how the platforms you use are dealing with these new statements.
The question of value
So, if these statements clearly set out the costs paid then it should be easy to decide whether the investments/services are of value? Ultimately clients will decide this for themselves, however advisers have a role to play as well. For a number of years COBS has contained the following guidance…
COBS 6.1A.16 G “In order to meet its responsibilities under the client’s best interests rule and Principle 6 (Customers’ interests), a firm should consider whether the personal recommendation is likely to be of value to the retail client when the total charges the retail client is likely to be required to pay are taken into account. “
Put simply, when you (as an adviser) are making a personal recommendation you should assess whether it is of value.
MIFID has also raised the bar with regards to the adviser responsibilities, introducing a new rule…
Cobs 9a.2.19 eu: ‘Investment firms shall have, and be able to demonstrate, adequate policies and procedures in place to ensure that they understand the nature, features, including costs and risks of investment services and financial instruments selected for their clients and that they assess, while taking into account cost and complexity, whether equivalent investment services or financial instruments can meet their client’s profile’
The impact of compounding
Stepping back from the regulation for one moment it’s worth reminding ourselves why this is so important. The table below shows the potentially destructive power of compounding charges over the long term. With £100k invested over 30 years, the difference between a 1 and 2% total charge is over £100k. Or 25% less. It doesn’t matter who these charges are paid to, the impact is the same. Charges are a drag on your returns.
|5 years||10 years||20 years||30 years|
ASSUMPTIONS: £100k invested. 6% annual growth
So, what should advisers do about all of this? Firstly, it’s never been more important to highlight the value you add outside of investment returns. Most adviser firms are increasingly good in this space, with financial planning, tax management, inheritance and family office services delivering huge benefits to clients. As clients receive their statements showing their investment costs it’s worth reminding them that this is (hopefully) not all you are doing for them.
Beyond that, and moving back to the regulation, it’s imperative that you have a view on costs. What is your house view on what represents a reasonable total cost of ownership? And then perhaps you can build a R/A/G process around it. For example, you might say that anything below 200bps total cost is acceptable (green). 200bps to 250bps is amber and goes to file checking. Above 250bps is red and would be viewed as too expensive. These numbers are just a guide, and as well as having the process it’s equally important you think through and use your own figures, but with the regulatory focus on costs increasing, and investor understanding of the impact of costs hopefully improving as a result of MIFID, we think this is a worthwhile exercise for advisers to conduct.
About Mike Barrett
Mike is consulting director, and sole-proprietor of the lang cat Isle of Wight office. A driver and survivor of platform mergers, migrations and RDR he held a number of senior roles at Skandia and Old Mutual Wealth. He is now working with platforms, advisers, banks and asset managers to help them create and communicate in a way that is a little less corporate and a little more human.