Oct. 01, 2010
New laws and regulations within various countries in Europe and across the EU as a whole are preparing the ground for the advance of fee-only financial advice in Europe. The most prominent example is probably the UK where independent advisers will have to charge their clients directly by 2012. Taking sales commissions from fund sponsors or banks, so called kick-backs, will then be illegal for independent advisers in the UK.
New regulation in favor of fee-only financial advice across Europe
But it’s not only the UK financial authorities who are putting pressure on financial advisers that take kick-backs and who, therefore, may not be giving optimal advice to their clients. The European Union has enacted a number of new regulations,of which the best known is probably MIFiD (Markets in Financial Services Directive), which mandates transparency and best execution for the client. Yet even more comprehensive laws are in the making in Brussels. One is called “PRIPS”, which stands for the packaged retail investment products initiative. It is likely to require that all financial products offered to private clients have to follow strict and uniform transparency standards – particularly with regard to the disclosure of costs and fees.
Even in Germany, the largest financial market in Europe, wealth managers are feeling the heat. Since the beginning of 2010 banks have had to write up a transcript of every meeting they have with a private client, documenting precisely client preferences, risk aversion and the investment recommendations they have made. The highest German court (Bundesgerichtshof) has also made a series of landmark decisions over the last few years strengthening the position of investors vis a vis banks, and mandating wealth managers to disclose possible conflicts of interest to their clients. Failure to do so has led to compensation awards to wealth manager clients in cases where losses have been incurred as a result of financial product recommendations.
Survey results show that fee-only financial advice is well known
In a recent research report on fee-only advice MyPrivateBanking research surveyed 300 wealthy individuals in Germany on their needs and preferences with regard to fee-only financial advice. The results show that this new type of financial advice is already familiar to many wealthy clients even though actual experience has been limited. According to the study, two thirds of participants were aware of the concept of fee-only advice but only 13% of them had actually used a fee-only adviser in the past. The willingness to pay for fee-only advice is not yet strong, as the client has to part with the fee to before actual investment success is visible. Only 10% of the surveyed wealthy investors would be prepared to pay 2000 euros or more to an adviser (regular commission-based advisers get on average substantially more than this out of their clients even though the client is in many cases not aware of it).
The level of satisfaction with fee-only advice was about 10% lower than the satisfaction of clients who used regular financial advice. Overall, these results show that while the legal foundations for fee-based advice have been laid, clients are not fully convinced of the advantages of fee-only regimes.
The study’s findings suggest that fee-only financial advisers must develop clear qualifications and quality standards to position themselves clearly in the market place. The focus should be on the segment of clients with more than 500,000 euros of investable assets, the group that shows the highest interest in fee-only financial advice. However, over the course of time the regulatory framework and the increasing education of clients will give fee-only advisers a good opportunity to gain a much bigger market share in the market for wealth management. In the UK, being furthest advanced in this respect, fee-only advisers have already achieved market share of more than 10%. A perspective that should make the traditional wealth management industry in Europe sit up and take note.
The MyPrivateBanking research report on fee-only advice can be ordered here.