Is this the end of the advice gravy train?

Industry faces shake-up as top wealth manager cuts fees, write Charlotte Gifford and James Fitzgerald

The era of paying unclear and expensive charges for financial advice could finally be coming to an end. The country’s biggest wealth manager this week announced a major overhaul to its charging structure – and industry experts say more will follow.

St James’s Place revealed on Tuesday that from 2025 it will scrap its controversial exit fees, following pressure from the regulator.

The FTSE 100 company had long faced criticism for levying a charge of up to 6pc if clients left the business early, with the fee falling to zero after six years.

It also said it is cutting its initial advice fee to 4.5pc down from up to 6pc, as well as reducing and separating out its ongoing charges.

St James’s Place looks after more than 900,000 clients, so the changes it announced this week have major repercussions for the financial advice industry.

Ian Millward, of Candid Financial Advice, said the decision is “one of the most significant changes in years” while Holly Mackay, of the research firm Boring Money, said the move from St James’s Place should bring down charges across financial advisers.

She said: “Continued downward pressure on pricing is inevitable. Shopping around and comparing like-for-like services remains mind-blowingly difficult for consumers and St James’s Place’s move will facilitate easier comparison.”

A St James’s Place spokesman said: “All clients will benefit from charges that are simple to understand and which are easy to compare with offerings from other providers.”

The company added that the total charge clients pay is “below the market average” for the service they receive.

But St James’s Place is not the only business under pressure from the City watchdog over the cost of fees, with many advice firms dropping their fees for the first time in years.

According to a survey of financial advisers by consultancy NextWealth, the average fee clients pay for upfront advice dropped from 2pc to 1.75pc this year, the first time it has fallen in five years, as new consumer protection and value rules have forced firms to rethink their charging structures.

The Financial Conduct Authority’s Consumer Duty rules, which came into force over the summer, mean financial professionals have to prove to the regulator that they are providing transparency over their fees and value for money to their customers.

Mike Barrett, of consultancy the Lang Cat, said firms have already responded by capping their charges and introducing fixed fees, arrangements that are especially cost-effective for larger pots.

“Wealthier clients might find advice charges coming down,” he said. He added that St James’s Place’s decision is proof that the financial regulator means business.

He said: “Any firm who thought it was just a box-ticking exercise will have taken a sharp intake of breath.”

In January, the regulator wrote to firms warning them that it will be paying “particular attention” to how financial advisers and wealth managers deal with price and value for consumers.

Then, in June, the FCA asked 1,300 financial advice firms to provide details of their charging models and how much they make from advice fees as part of a separate review.

The regulator called on firms to urgently review their charging models to ensure they are delivering fair value to consumers, with financial advisers now being forced to either lower their fees or show customers exactly what they are being charged, and why.

Investment platforms have also come under fire over poor value for money in recent months, with the regulator threatening action because they were found to be pocketing millions of pounds of interest on cash balances.

The regulator is continually reviewing firms’ fees as part of Consumer Duty, and has said it will penalise financial advisers if they cannot prove they are providing value for money.

Jeremy Hunt, the Chancellor, and the FCA, are keen for more people to access financial advice and invest in the stock market, as only 8pc of people in Britain use an adviser, according to official figures.

But the problem is that financial advice is seen as too costly for many people. To tackle this, the Treasury is reportedly drawing up plans to loosen financial advice rules to allow banks, brokers and credit unions to provide basic financial “guidance” to consumers for a fraction of the cost of seeing an adviser.

The plans, likely to be outlined in a White Paper next month, will allow these large financial institutions to help customers with basic financial recommendations, without straying into financial advice.

The Consumer Duty, by requiring advice firms to prove their service offers value for money, should – in theory – help stamp out the “fee-for-no-service” practice that some have warned is endemic across the industry.

Telegraph Money reported last month that a claims management firm had won back millions of pounds in compensation for clients of St James’s Place, in many cases because they had not seen their adviser in years despite paying an annual fee. AMK Legal said they were far from the only organisation where advisers were not seeing

clients. St James’s Place said it regrets any occasion where a client has cause for complaint. Andrew Croft, the outgoing chief executive of the wealth manager, has said customers have always been able to turn off the ongoing advice fee.

The Consumer Duty could also lead to fewer clients paying annual fees for ongoing advice.

The FCA said in 2020 that it was “concerned” that many financial advice clients are paying for ongoing advice who do not need it.

More than 80pc of clients who pay for advice do so on an ongoing basis, according to the regulator. The average annual fee is 0.8pc, its data show. This works out at £2,000 for a £250,000 pot.

Mr Barrett said that it will be easier for advisers to prove their worth to the regulator when clients are undergoing a major life event. “It is challenging for advisers to quantify the value of their service when nothing is going on,” he said.

ARE YOU PAYING A FAIR PRICE FOR ADVICE?

Some clients might decide they are better off opting out of ongoing advice and paying for a review every few years instead.

Clients who have been with an adviser for several years and seen their portfolios grow significantly in that time could be overpaying for advice.

Firms typically have a tiered fee structure whereby wealthier clients pay a smaller percentage fee. However, some do not reduce their clients’ fees as their portfolios increase in size.

Paying a fair price is not just about the fee you pay. It is also about investment performance, which can be difficult to work out. If your money is held with a large wealth manager, then you can use indices provided by Asset Risk Consultants (ARC) to assess their performance. These indices collate data on the investment portfolios of more than 140 wealth managers.

Paul Kearney, of ARC, said: “If your investment performance – after fees – ranks in the top quartile or even the top half of the market, it’s likely your fees are appropriate because your investments are ahead of industry benchmarks ( which should also be reported net of fees).

“On the other hand, if your portfolio is falling short of the benchmark, you are effectively paying for underperformance.”

For example, the average moderately risky portfolio has returned 55pc over the last 10 years.

If your wealth manager has fallen below this, then it may be time to ask what you are paying for.