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Ongoing charges - What does it mean for your firm?

27 March 2024

At the start of the year we published our Wealth Management Annual Review (WMAR). This was our reflection on all the trials and tribulations faced by the wealth management sector during 2023. We provided insights into the Consumer Duty, M&A due diligence, and prudential regulation, among other topics. We also mentioned that we anticipate 2024 being a similarly challenging year for firms in the sector. 

On the 15th February, the first potential challenge of the year came to light when the FCA announced it would be requesting information from firms about the delivery of their ongoing advice services and the Consumer Duty. While the Consumer Duty is still relatively new as a regulatory initiative, the issue around ongoing service is potentially over ten years in the making.

Switching off trail commissions, which was the percentage fee, typically 0.5%, taken from the sum of the investment under the Retail Distribution Review (RDR) meant many firms moved their clients to an "ongoing service" fee. MiFID II then introduced the need for an annual review, which was factored into the "ongoing service". Several revisions of client agreements later, and firms found themselves promising to review a client's position at least annually. Some went further and promised this would be in the form of a full face-to-face meeting, all included in the ongoing fee and at no extra cost to the client. As time has gone on and the costs to advice firms have increased, so has the need to find ways to increase the revenue stream to meet them. Unfortunately, this has led to some advisers cutting corners when it comes to the ongoing service and annual reviews provided to their clients. This isn't to say that all advisers are in the same boat; many find themselves behind on their annual reviews, and while not an ideal position, it is understandable, with a genuine intention to catch up and deliver what was promised to their clients. However, some bad actors still exist – some firms don't do them at all, some firms only do them for certain clients, and others do them, but the quality is so poor they might as well not have bothered – and not only has this now been picked up by the FCA but also by Claims Management Companies (CMCs).

In respect of the CMCs – who can blame them? It's an easy win for them: "Were you promised a review of your investments that never materialised? Do you pay expensive ongoing service fees but don't receive the service?" Both questions may be coming to a tube carriage near you in the not too distant future, but for the FCA, this is a culmination of various communications issued to firms in recent times about their expectations in this area. Of course, this is now reinforced by the Consumer Duty and the almost unavoidable truth that not providing a service for which you are taking a fee or taking a fee for a service that is not required does not demonstrate fair value and has the potential to cause foreseeable harm to consumers.

The fact that investors are now, more than ever, willing to take a gamble on whether or not the advice they received to transfer their pension was right for them or if that palm tree plantation in the Caribbean was, in fact, a poor investment recommendation – we might be on the verge of the next big challenge to be faced by the wealth and investment management sector.

Now, we appreciate there will be a proportion of these claims that are entirely valid, and where firms have willingly and knowingly taken fees from clients with no intention of offering the corresponding service you will find little sympathy coming from us. But where firms' business models have changed, grown, matured, and the client bank is now a mix of legacy clients from a different era and new money, we do have some sympathy.

For example, if you operate a business model where you only take on clients with upwards of £500k to invest, and your fees and service levels reflect that accordingly, an annual review of some description is likely to be very worthwhile as they grow their wealth and move through the various stages of life. However, within that client book, there is likely to be a legacy client, who has been with you for many years, who no longer meets that target market definition of at least £500k to invest. In fact, they have £60k and are retired, at a very different stage of their life. For these individuals, an annual review, of any sort, is possibly not needed, but by virtue of RDR, MiFID II, and the repapering exercise you undertook at that time – you've promised them one. And herein lies the issue – what did you promise them? 

Was your advice predicated on the fact that the only way the transfer and investment strategy were suitable was if you met with them annually to discuss things in detail, or have you promised them to be at the end of the phone whenever needed and to meet with them at least once annually, face-to-face, at their convenience? But more importantly, what have you been delivering? We know Mr. Smith is retired, happy with his level of income, and doesn't really want to meet with you unless there is some sort of stock market emergency. But your initial advice, likely many moons ago, stated that your recommendations would only remain suitable if you continued to meet annually and review the position, which, for the last 10 years, you haven’t. Now, does this raise the question of whether the advice is now unsuitable? Probably not but, in short, you must be delivering on what you have promised your clients and charge a fee for – unless you want to give a percentage of it back.

There will be many firms in this position, and this isn't just about getting on the front foot for any complaints that might come through the door; this is about ensuring your clients are receiving a good outcome, preventing foreseeable harm, and giving them fair value. The starting point should be to ensure you have segmented your clients correctly. This then allows you to identify the group that has £60k invested but is currently paying the same fee as those with £500k invested. This gives you the opportunity to examine and determine whether or not they are getting what they are paying for – and more importantly, whether they need it. If they don't, you can switch it off, issue a new client agreement detailing what they are now paying for, and reduce their fee accordingly.

If you are not sure how to get this off the ground, or if you have cause for concern, this is where we can help. Our expertise lies in tailoring solutions that align with your unique business needs. We understand the intricacies of client segmentation, offering invaluable insights to identify and rectify disparities in fee structures.


read our WMAR report

If you have any questions, require further clarification, or would like to explore how our tailored solutions can benefit your business, please do not hesitate to contact the Regulatory Consulting team. 

Authors: Sarah Jackson, Matthew Baggott and Rachel Kpiki

Further Reading