Following a review of its client bank, Standard Life’s restricted advice business, 1825, announced that it would be ‘dropping’ 750 clients after concluding that the clients were not receiving ‘value for money’. 

Reaction to this news fell into one of two camps:

• A minority gave 1825 benefit of the doubt, stating that it is good practice to review your business from time to time and make changes to your products, service or customer base;
• A cynical majority felt that 1825 was dumping clients because they were unprofitable, suggesting a concern for profit over client relationships.

Our view is that 1825 probably undertook the review in good faith, with one eye on the FCA’s undoubted continuing focus on value for money in the investment distribution chain. Thus far, this focus has primarily been on the asset management end of the chain, with new rules arising from the FCA’s Asset Management Market Study taking effect from September 2019. These rules will require asset managers to undertake an annual assessment of the value of a fund’s charges. You won’t find the phrase ‘value for money’ in those rules – the industry didn’t like the term so the FCA agreed to drop the ‘for money’ bit. But make no mistake, value for money is what we are talking about.

In addition, the FCA has also given strong indications that value for money is a key focus of the yet to be completed reviews of RDR and FAMR. Research carried out for the FCA indicated that around a third of clients did not feel that financial advice received had been value for money. While that might suggest that two thirds are happy with the value of advice, we would caution that clients tend not to shop around for advisers and, in any case, it is nigh on impossible for clients to compare advisers’ fee scales since few firms publish these on their website. In its 2017 Sector Views paper, the FCA stated:

“Some advisers may not pay enough attention to value for money when they make personal recommendations to consumers. Relatively few advisers are transparent about their pricing before they sell advice. This does not incentivise advisers to compete on price and may result in limited pressure on them to reduce their charges.”

Here, we are in danger of confusing price with value. The former is the cost of advice and the latter is the benefit the client gets, or perceives (s)he gets, relative to the cost of the advice. From research over the years into consumer behaviour and why/how people make ‘buying decisions’, value has been found to be ultimately more important to consumers than price and is therefore what firms should focus on. And remember, there is, in any case, longstanding guidance and rules requiring firms to consider whether the cost of advice is commensurate with the benefit the client will receive from taking the advice.

COBS 6.1A.16 states:
“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 or any other related service 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.”

Pre-RDR business model
It is probably not controversial to suggest that the business model generally adopted by adviser firms before RDR was to build recurring income. This made, and makes, perfect business sense in a world where the eventual exit for most firms is to sell the business and the (not quite correct) expectation is that the more the recurring income, the higher the sale price of the business.

Following RDR, the ongoing adviser charge, which, in most firms pre-RDR had probably been 0.5% in trail commission terms, started to creep up to 0.75% and, mostly, 1% p.a.

Gold, Silver, Bronze
In most firms, the ongoing service actually provided had not changed. Firms often increased their ongoing service charge for no better reason than because other firms were charging 1%!

Many firms operated tiered service levels and still do. While it is to be hoped that firms have moved away from the ubiquitous yet unimaginative Gold/Solver/Bronze labels, the tiers always entail some version of basic clients getting a basic service for a basic charge and ‘better’ clients, generally those with more wealth, receiving an enhanced service, at an enhanced price!

There have been three common problems with firms’ ongoing services over the years.

First, some firms charge for an ongoing service but the service comprises an ‘offer’ of a review where client inertia results in many, if not most, clients not actually receiving a review.

The second common issue is that many firms include things in the service description that are essentially meaningless. These fall into two categories:

• Things that firms have to do regardless of whether a client pays or not, for example, “We will keep your personal data up to date.” or the impossible to monitor, “Gold clients’ telephone calls will be returned within two hours.”
• Things that are of little or no real value, for example quarterly newsletters! The cost of the review service for even the lowest service level usually means that these are really expensive publications. It is highly unlikely that any firm would charge as little as £280 p.a. for any service level, yet that could buy a year’s subscription to the Financial Times or similar. It is probably not unreasonable to suggest that the content is likely to be better than the average newsletter in both quality and quantity!

The final issue we sometimes see is tiered service levels where there is no substantive or justifiable difference between the levels but there is a price differential.

That this matters is evident from those cases where the FOS has required firms to refund ongoing fees because of services being misdescribed or not delivered. 

Periodic assessment of suitability
We believe that these issues might have at least influenced the introduction in MiFID II of the requirement on firms to undertake a periodic assessment of suitability for clients where they state they will do so or where there is a mandatory requirement to do so. The rules on this are dotted around the FCA Handbook but can be summarised in plain English as follows:

• Where a firm takes an ongoing adviser charge, the firm has an ongoing relationship with the client;
• Where a firm has an ongoing relationship with a client, it must undertake a periodic assessment of suitability;
• Where a periodic assessment of suitability is provided, it must be done at least annually and be based on the up to date KYC information that is required to assess suitability.

Some firms have asked us whether it is possible to offer an ‘admin only’ service to clients where the ongoing charge is not enough to provide a ‘proper’ review. The answer is – NO! If there is an ongoing charge, there is an ongoing relationship and the periodic assessment is obligatory.

Application in practice
Many firms have continued their pre-MiFID II practice of meeting with review clients face to face. However, there is no rule requiring face to face meetings each year with clients in order to deliver the periodic assessment of suitability. Accordingly, the following process is one which is compliant and which firms that find it difficult to service all their clients on a face to face basis might consider.

• A few weeks prior to the agreed review date, write to the client asking whether there have been any changes in their situation (objectives, risk, time horizon, financial situation etc. – all the normal key elements of KYC). This could alternatively be done by telephone.
• If the client confirms no changes* then write to the client on or around the review date confirming the continuing suitability of the existing investments or documenting a personal recommendation detailing any changes that are recommended.
• If the client advised changes, a discussion will probably be indicated but this can be by telephone or face to face. A personal recommendation would follow if required or a periodic assessment of continuing suitability issued.

* A process is required to account for clients that do not respond. Our initial view was that this will probably require a statement in the original letter stating that if the client does not reply by X date, the firm will issue an assessment of suitability assuming no material changes have occurred and the follow up letter would have an appropriate caveat on the assessment.

However, since this article was originally published in July 2019, we have come across firms that believed they were satisfying the annual suitability assessment by writing to ALL clients by default, confirming suitability if there have been no material changes and asking clients to get in touch if there have been changes. Comparing this process against the essence of the applicable rule (COBS 9A.3.2) which states that the written confirmation of suitability …

“… must contain an updated statement of how the client’s investments meet the preferences, objectives and other characteristics of the client.”

… we consider that the assessment and confirmation can ONLY be done if client information that is material to the assessment of suitability has been reconfirmed or updated. So, firms should write to non-responders confirming that it is not possible to confirm the suitability of existing investments without such information and urging the client to respond. Continued non-response should lead the firm to consider whether further follow up is appropriate and whether the ongoing service should be terminated.

There is also a need to consider the point at which a non-responding client should require a decision as to whether the ongoing service is no longer required, or being provided as intended, and the service – and the ongoing adviser charge – terminated. A non-response in one year could have many causes not necessarily meaning that the client does not wish to continue receiving and paying for ongoing service. But where a client fails to respond for two or three years, it seems likely that the service should be terminated. Firms should have a documented policy in this regard.