The Chief Executive of the Financial Conduct Authority (FCA) speaking at a press conference after the final Financial Services Authority (FSA) public meeting has poked a very long stick into the hornets nest that is the intermediary sector.
Broadly speaking what he has said is that the adviser who charges the customer on a percentage basis and receives that payment only if it comes from a product (something called adviser charging) is potentially causing “dealing bias”.
Dealing bias is a new phrase that I can’t recall hearing from the FCA or FSA before but my interpretation of it is a bias brought about because the adviser will only get paid if the consumer buys a financial product that can facilitate such a payment.
His concern seems to be that the trend of taking the adviser charge from the product as a percentage of assets could still be skewing the market.
Readers may remember that one of the thrusts of the Retail Distribution Review (RDR) was that the abolition of commission on investment and pension products would remove perceived product and provider bias.
I have always thought that this was a bit odd. There really wasn’t much substantive evidence (other than anecdotal evidence) that commission bias existed.
Anyway adviser charging was never going to remove it if it did exist. The adviser who pre RDR took 3% commission on a product simply replaced that with 3% adviser charging.
Interestingly though the IFA market generally (but not entirely) had self selected 3% as a reasonable commission level; it was primarily the retail banking sector and some extremes of the intermediary community who continued to take commissions of double or more the settled 3% figure.
Martin Wheatley in my view though is right, but for the wrong reasons!
The problem is that the percentage charge approach, which is a hang over from the previous commission regime, simply misses the point that it is advice and planning that the consumer values not the product solution.
The problem is also the speculative nature of the intermediary advice.
Put simply most advisers operate on the basis that they will do all of the really valuable work effectively for ‘free’ and then only get paid if the consumer buys a product.
If you break the process of delivering financial advice into the various steps this “speculative” approach doesn’t make much sense.
Engaging with a new client, completing the know your customer (fact finding), anti-money laundering, research and analysis and the construction and delivery of the advice, is where the cost to the intermediary lies.
Completing the application form process and applying for a product has some value but actually the smallest part of the value chain.
And yet the speculative approach results in payment only if the advice leads to a product.
I don’t like this approach because it means we seek to charge our client for the wrong service. So we don’t do it.
Instead we charge for the delivery of the advice – and this advice does not always lead to a recommendation that a product is purchased (although clearly on many occasions it does).
We charge a project fee for advice based on the value we are delivering, the expertise we have to bring to bear to deliver the advice, the regulatory risk any recommended solution brings to the business and hopefully and unsurprisingly, profit!
A project fee rather than an hourly rate because of the consumer fear that an hourly rate causes the work done to expand.
We stand by our quoted project fee and it disciplines us to be effective if we want to make profit.
Until recently we charged a percentage implementation fee (the approach criticised by the FCA yesterday) at between 0.5% and 2.0% of assets depending upon the amount to be invested.
The FCA needs to recognise why this continues to be the case for most IFAs. It is because that is where the risk (and dare I say regulatory cost) lies for the intermediary.
The FCA, Financial Services Compensation Scheme (FSCS) and Professional Indemnity insurance market are primarily still focused on product implementation rather than advice per se.
We have decided to stop charging for implementation on a percentage basis but not because of perceived dealing bias, but instead because the implementation piece is not the part our clients value the most. Instead we will implement for a fixed amount.
The bias if there is one will lean towards our advice fees which will be greater than the implementation fee.
Interestingly, bundled together the total advice and implementation project fees will be less than the majority of our peers who continue to charge a speculative percentage basis.
Our challenge is that the general public still holds to the belief that advice is for ‘free’.
This myth was created by some commission based advisers and product providers (with enhanced smoke and mirrors investment products) who made it seem if the cost of commission, as well as the commission facility, was borne by the product provider rather than by the client from product charges.
I don’t think that the current post-RDR world is by any means perfect. But I do believe that it is moving in the right direction.
It is quite easy to see where the charging debate is going and a lot of advisers are not going to enjoy it.
Coping with the new world is going to require quite a lot of radical change in the intermediary sector and like all change some will try to resist it.
Better in my view to accept the fact that “change is the nickname used by opportunity”.
