In the financial industry, questions such as ‘How do you earn your money?’ can discomfort many but anyone running an honest business will be confident that they offer excellent value and feel at ease discussing it.
As an overview, a typical financial advisor will charge 1-2% per year of the assets they manage as charges (even if fee based). I see anything around 1% as reasonable – but only as long as there are no hidden inducements.
The industry has a history of finding ways to apply hidden charges. Thankfully, now, it is impossible for locally regulated institutions and advisors to do so, such is the force of regulation.
However, one of the last remaining practices, open to abuse worldwide, including most of Europe, is fund managers’ ‘marketing payments’ to the advisors and financial institutions that recommend them. These cover the cost of publicity for the referring advisor or institution and it is logical a management company covers the cost of marketing its product, if reasonable.
The problem is it has been abused in some countries and used to hide charges.
This was the case in the UK, with advisors receiving excessive payments – some more than 4%! – for ‘marketing’, increasing investors’ costs.
Rather than trying to regulate it, marketing payments were banned completely in 2013, with the Retail Distribution Review (RDR).
In response, many UK companies and advisors moved abroad, setting up where the practice could continue – including, surprisingly, France, which has strict regulation; but also a loophole.
A UK authorised advisor can use European passporting rights to trade in France (but cannot advise on France or the French system as the UK passport does not give the right). RDR rules no longer apply as the advice is not given in the UK and, as the company is not under French regulation, advisors can accept excessive marketing payments without breaking any laws!
What about those who are bound by French laws and regulations?
In France, these payments are capped at very low levels, thus French regulated advisors are heavily policed. [As an important note, marketing costs are not applicable to French guaranteed funds (‘fonds en euros’); here, we are talking about stock market linked investment funds.]
There is no way the advisor can refuse these payments in a way that benefits the investor. If they decline it, the fund manager simply keeps it, leaving the investor no better off.
Some advisors may reduce the annual management charges to clients by what they receive in marketing payments, effectively passing it back to the clients. It is rare though.
To be clear, French regulated advisors who take these payments are not acting illegally. The payments are no issue if used honestly, it is the dishonest practice that causes concern.
The good news is that marketing payments are now banned in Europe under MiFID 2, a European Directive that from January aimed to change many parts of the financial industry.
It means advisors who are legally registered and authorised anywhere in Europe will need to review how they get paid. If marketing payments were being used to lower the cost to clients, direct costs will need to increase. So, you should have received a letter from your advisor.
This may sound bad, but it is good news as unscrupulous advisors will not openly admit they need to increase their management charge by 3% or so a year to keep their revenue stream!
Advisors must also prove that the fund fees fall in line with their increase i.e. the funds they are recommending are cheaper due to marketing costs being removed. Arguably, fund managers in Europe should simply stop paying them and reduce their costs, as part of the new law, so this should take care of itself. So you will save money if excessive marketing costs were being taken.
The new law only applies to independent advisors and not those who are tied, such as banks, life company offices and / or advisors affiliated to one company. These may continue to apply marketing costs (as they cannot recommend one product over another with only one provider).
I would prefer a level playing field. If some can still receive marketing payments, they will ‘appear’ to be cheaper than those who cannot.
Does this change mean independent advisors regulated outside France can no longer get away with hidden charges? I would like to think so but am repeatedly amazed by the “creativity” of some to put themselves before their clients.
Is there a way to ensure you are dealing with honest advisors who are bound to fully disclose how they are paid? The ideal is to use locally regulated independent advisors who are comfortable to subject themselves to scrutiny.
If you are moving to or living in France, be sure the advisor you talk to is both independent and appropriately regulated (thus qualified) in France. Each must be registered with the AMF (Autorité des Marchés Financiers) and you need to see evidence of this. The fact that someone in the company (i.e. not the advisor you deal with) is authorised may not protect you (there are ‘networks’ that have a regulated person, but have advisors that are not), so be sure the advisor you deal with is authorised by the local regulator.
If you do this you should have confidence that you know exactly what you are paying for, and that the advisor is impartial.
This column was written by Robert Kent of Kentingtons financial advisers.