This is how to demonstrate value

Posted 22 November 2023 by Sam Patterson

“Our intention is not to set prices and our rules don’t have this effect”. This is what Sheldon Mills, Executive Director at the Financial Conduct Authority (FCA), said in 2022 in relation to the price and value outcome.

Now we could debate all day whether this was, or wasn’t, the FCA’s intention. In reality the Consumer Duty certainly has had an impact on many firm’s fee structures, with perhaps St James’s Place (who are to remove their exit fees on pensions) being the highest profile example to date.  

One thing that we can all be confident about though is that the FCA does want to see firms acting to deliver good outcomes for clients. Whatever price a client pays, a firm needs to be able to demonstrate that the client will receive reasonable benefits. But one question I’m being asked more than any other is ‘How do you demonstrate value to a client in practice?’

A quick disclaimer at this point - I know that most firms are different. Many firms have different charging structures and they offer differing levels of service. After all, different clients will want different things from their adviser.

But there is one overarching way to demonstrate that you’re providing clients with value for the price paid: you should be able to evidence that your client’s behaviours have changed since you became their adviser. This would involve a change in a client’s behaviour, due to your advice and support, leading to better client outcomes. That’s what the FCA would like to achieve with its Consumer Duty price and value outcome.

Let’s take a look at an example

To demonstrate what I mean by this I’d like to you to think of your clients - it could be the clients you personally advise, or clients of your firm. How many of these have you identified as being conscious of ESG issues? How many have you adopted an ESG-focused investment strategy for? There is, of course, a reason why I ask these questions.

As part of the FCA’s Financial Lives Survey 2022 (slide 43/44), the FCA asked 4,182 UK adults for their feelings in relation to ESG and 74% agreed that environmental issues are really important to them, 79% agreed businesses have a wider social responsibility and 85% strongly agreed that businesses have a duty to pay employees fairly.

Of the 4,182 UK adults questioned, clearly there was a clear interest and agreement with ESG principles. However, the same survey found that only 23% of adults were ‘very’ aware of Responsible Investing as an investment strategy.

Your firm may be different, but of all of the firms I’ve worked with, I can’t think of many that get close to having c75% of clients invested in a way that takes into account environmental issues through a responsible investing strategy. Of course you can point out that the majority of clients do like the idea of responsible investing, but when the associated fees and potentially more volatile investment returns are explained, they’re typically less keen on the idea. But could you and your firm demonstrate this with evidence?

I use the example of ESG and responsible investing as I’m sure most of you reading this will agree that it’s an issue that will only become more important in the future - a continuation of the momentum that we’ve already seen over the last couple of years.

Another way to demonstrate good outcomes

But if we move away from the example of ESG investing, how else could you demonstrate good outcomes under the FCA’s price and value outcome? Well the key is that you have to be able to demonstrate and evidence how your advice and expertise have changed a client’s behaviours and improved their outcomes.

Actions could include increasing pension contributions to help clients achieve the retirement they’ve wanted, or it could be to demonstrate your support in helping clients commence a regular gift to their family to support them. These are nothing more than a brief snapshot of the potential actions you could take. The key is being able to evidence that you have made a difference to a client.

As always with the Consumer Duty, it’s important to be able to ‘prove’ it

Documenting the actions I’ve just suggested on your client records would be an important element of being able to do so. Remember that being able to demonstrate value added is vital not only for individual clients, but also to the different segments of clients that you should have already identified as a firm.

Of all the outcomes introduced by the Consumer Duty, the price and value outcome does seem to have caused the most trouble for the advisory firms I speak to. Afterall, what is value? How do you demonstrate value in relation to the fees paid? There are an increasing number of examples of best practice in advisory firms. The answer is simple in my mind: demonstrate and evidence that you’ve made a positive impact on a client’s behaviours.

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Sam Patterson

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Sam Patterson