Shouldn’t pressure to be more fee-transparent influence advisors to lower their charges? Richard Garland
, a distribution leader at Investec Asset Management, offers an insight into why this does not always happen.
The intense pressures that financial advisors face – from engaging a new generation of customers, to being clear about the advice fees they charge – are shared throughout the world.
“It doesn’t matter where they are based or which type of firm they are, advisors all have the same issues,” says Richard Garland, Managing Director – Global Advisor, at Investec Asset Management.
Garland hosted a select breakout panel of financial advisors at Investec’s large 2015 Global Insights client conference in London recently (see report, pages 42-43). Twelve advisors from around the world took part in this breakout session.
The panel reflected the commonality of challenges globally – and so does Garland’s personal experience with bank and wealth management customers. However, there is not always a commonality in how firms are responding.
Transparency of advisor fees is a particular case in point. Regulators are ripping open this issue and, logically, fees should fall. So it is a surprise to Garland that this is not always the case.
“We have seen that some advisors have brought fees down, while others have in fact increased them. One advisor, for example, brought down its fee to charge a wrap fee of 50 basis points. But we have seen some banks actually increase their fees, in some cases to over 1%.”
Fee changes, driven by transparency, is something Garland sees banks and advisors everywhere grappling with, even in markets where there has not been any direct regulatory pressure – at least not yet.
So Garland’s theory, then, is that advice firms are trying to get ahead of the issue, especially at global businesses that have already felt regulatory pressure in some of their markets, such as in the UK and the Netherlands, and expect fee transparency to pervade other international areas sooner or later.
Rising fees most likely indicate that some large banks are engineering their businesses globally to keep clients that are strategically important, says Garland. Private banks do not want to be high-turnover execution venues – a valid business model for some firms, like smaller wealth managers – but want wealthy customers who are more likely to need and pay for advice before allocating large funds.
The right fee level might still be debatable, yet Garland understands why some banks increase them. “A global bank might have the right to charge higher fees because it is doing more things for its customers, while smaller independent financial advisors probably cannot justify this and so must lower their fees to become more competitive.”
Going for higher fee customers implies that some banks will jettison swathes of less valuable clients. Certainly this is an expected outcome in the UK under the Retail Distribution Review, and may well result in the wider European Union under regulatory change there – namely MiFID II, a regulation set for implementation in 2017, which partly deals with advisor fee transparency. But Garland urges banks to consider harnessing technology to keep less profitable customers in the interests of business sustainability.
“The larger wealth managers can use technology for subscale clients to offer a simplified form of advice, or ‘robo-advice’, and turn them into fully fledged high-net-worth clients when their assets grow.”
Keeping their less profitable customers by offering a scaled-down service could prove particularly useful for keeping younger clients loyal. This generational shift is another common global challenge for advisors.
In the meantime, and despite the pain of transition, moving to business models with transparent fees should be attractive to firms, says Garland.
“If you can get one advice fee over all of your assets, that is a fantastic business, and I think we will see large firms embrace this even before regulation comes along.”
©2015 funds europe