Chasing the cheapest products could hurt your succession planning

While there are implications in running a company on unsustainably high fees and charges, there are similar issues when charges are below a certain threshold.

Louise Jeffreys, managing director at mergers and acquisitions specialist Gunner & Co, explains buyers typically have propositions that sit between 1.4 per cent and 2 per cent all in, including platform, advice, investment management and funds.  

"Therefore, if an adviser has focused on an ultra-low proposition, sometimes as low as under 1 per cent, it becomes tricky discussing the sale," she says.

"It therefore has an impact on the attractiveness of the firm, and also the sale strategy for the business seller."

She says where larger businesses can deliver economies of scale, clients typically will not be worse off post-sale if they sit in the 1.4-2 per cent range, but below that "things become much harder".

Here you have a firm who may feel it's in their best interests to put clients into these lower-cost solutions, but by doing so adversely affects its ability to sell. That's not a good little market dynamic.

Angus MacNee, ValidPath

Under consumer duty, advisers have an obligation to provide fair value to their clients and there is evidence this is already weighing on their minds.

Almost a fifth of advisers told FE Fundinfo they now have a greater focus on value-for-money investments and more scrutiny on fees when looking for model portfolios or discretionary managers.

But this does not mean they should always be chasing the cheapest deals on offer.

Angus MacNee, chief executive of adviser network ValidPath, which runs its own succession solution, says: "It's very hard with a consumer duty hat on to see how that can work.

"So here you have a firm who may feel it's in their best interests to put clients into these lower-cost solutions, but by doing so adversely affects [its] ability to sell. That's not a good little market dynamic."

Cheap as chips?

Lawrence Cook, who runs discretionary fund manager comparison service Mabel Insights, says it is easy to access "cheap as chips" investment solutions these days but he too cautions against blindly opting for the cheapest products.

He says: "Ultimately, most IFAs are going to end up selling their business either through some internal management buyout, succession plan or to a bigger acquirer.

"The bigger acquirers will tend to have their own investment solution.

"So if you, as the seller, you've driven down the price and that's been your focus of your proposition to get it as cheap as possible, then typically what those IFAs have done they've not trimmed their own advice charge. What they've done is look for the investment solution that's cheapest.

"The problem with that is that when you come to sell, if the acquirer has got its own investment solution, which is more expensive than one that you've been using, that's going to be very difficult to move clients from A to B. It's not impossible but it's very, very difficult," Cook continues."

According to Cook, this means IFAs that do use cheap as chips investment solutions "eventually undermine their flexibility and scope to sell their business and, potentially, ultimately the value of their business".

Jeffreys says some buyers may be able to maintain ultra low-cost solutions but typically not with the same service approach, which creates its own issues. 

"Some buyers may have lighter touch or desk-based services, but there is a risk that this isn’t an approach the client wants or is familiar with," she says.  

"The consumer duty further clarifies things, as businesses cannot have clients on disparate propositions, leading to clients being treated differently."

Different options

Advice companies that operate on a very low-cost basis, below 1.4 per cent, have a number of options when wishing to pass the business on, says Jeffreys.

Internal succession may be an option for some, albeit "having the right people in place to deliver that is fairly unusual", she says.

More likely, the seller will have to be open minded to their clients eventually paying higher fees and the principal needs to be part of that journey, she continues. 

Financial planners shouldn’t undervalue their experience and expertise, both for commercial reasons and for the impact that can have on succession planning

Louise Jeffreys, Gunner & Co

"The risk is clients choose to leave the service, but since they are unlikely to find another adviser at the lower price-point, that may not happen," says Jeffreys.

"The approach has to be well thought out and implemented sensitively, as the risk of losing clients sits both with the buyer and the seller."

Charging appropriately and fairly is essential, but running a profitable business that delivers value to clients should not be shied away from, adds Jeffreys.

"Financial planners shouldn’t undervalue their experience and expertise, both for commercial reasons and for the impact that can have on succession planning."

carmen.reichman@ft.com