The rising costs of running an IFA
The cost of operating as an IFA has risen dramatically over the past few years. The Financial Services Compensation Scheme interim levy, Financial Ombudsman Service levies, additional costs arising from the RDR and, most recently, charges for the Money Advice Service have all hit advisers’ pockets.
Highclere Financial Services partner Alan Lakey says the cost of being an IFA has skyrocketed. “In 1988, I was charged £150. My invoice last year was just short of £6,000. It has risen twentyfold just to pay for the privilege of what I had already been doing.”
Informed Choice managing director Martin Bamford says although the general cost of providing advice, particularly admin costs, have risen, increasing regulatory costs stand out.
One of these is the Money Advice Service, which is funded by a £43.7m levy on regulated firms.
Bamford says: “Our MAS levy was only 0.1 per cent of turnover but it feels like an unnecessary expenditure. I would rather be spending it on marketing activity where I can secure a 20 to 30 times return.”
Lakey says the MAS levy is effectively funding consumer education through IFAs’ clients. He says: “There are five avenues the MAS can call upon, such as central Government funding. It is not fair for our clients to subsidise it.”
Julian Stevens: ’It seems the FSA is going to want to know what you charge for every single transaction. The regulator seems to have gone bonkers and is charging us a for tune for the privilege’
It is not just the bill for the new MAS that IFAs are being asked to stump up for. Footing the bills for other sectors seems to be becoming a habit.
The FSA has recently issued an extra £25m levy to build up the Financial Ombudsman Service reserves following the banks’ judicial review into payment protection insurance which caused the FOS to plunge into a £7.6m deficit.
Bamford says: “Our FOS levy increased by 48 per cent this year, although it remains the smallest part of our total invoice. As a firm that has never sold PPI, it feels unfair to pay higher costs.”
Martin Bamford: ’To have a system where firms can become suddenly liable for huge invoices with little notice is not a viable way to operate any business’
The FOS has also increased its professional indemnity insurance award limit from £100,000 to £150,000. Although the costs to IFAs are not likely to be excessive, it may push up professional indemnity insurance premiums.
Bamford says: “Premiums are likely to increase as insurers have to cover a higher potential liability.”
The FSCS levy is another continual bone of contention for IFAs. The annual FSCS levy for 2011/12 has been set at £240m, with investment intermediaries having to pay £40m. This is a big reduction from the £474m paid in 2010/11 but that included one-off payments to cover the Keydata debacle.
Lakey says: “Under the FSCS model, we have essentially written a blank cheque as an industry. It is cashed in annually but we are also asked on an ad hoc basis to pay additional amounts.”
Bamford believes the ad hoc nature of the FSCS is partly why it has hit the industry so hard.
He says: “To have a system where firms can become suddenly liable for huge invoices with little notice is not a viable way to operate any business.”
Alan Lakey: ’In 1988, I was charged £150. My invoice last year was just short of £6,000. It has risen twentyfold just to pay for the privilege of what I had already been doing’
Although FSA director of conduct policy Sheila Nicoll has said that rebates may be granted, IFAs remain gloomy.
Harvest IFM director Julian Stevens says: “I am not going to hold my breath.”
Bamford says: “At best, we expect to see a reduction in our annual invoice next year, assuming no more big institutions go bust and dump their liabilities on the sector before then.”
Regulatory change will also bring more charges to bear on IFAs. Capital-adequacy requirements will double for small firms from £10,000 to £20,000, which Stevens thinks will hit some firms hard. He says: “It is just dead money that we are not allowed to touch or even put in an interest-bearing account. We cannot take it back until after God knows how many years if and when the FSA says so.”
Lakey criticises the whole concept and says if advisers have PI insurance and are covered by the FSCS there is no need to increase cap-ad requirements.
The latest addition to new data reporting measures unveiled by the FSA last month will require advisers to submit adviser-charging data on payment methods, charging structures and complaint data at individual adviser level. The FSA’s cost-benefit analysis included in May’s consultation paper predicts that ongoing costs to businesses will be between £700,000 and £1m a year.
Stevens says: “It seems the FSA is going to want to know what you charge for every single transaction. The regulator seems to have gone completely bonkers and is charging us a fortune for the privilege.”
Lakey agrees that reporting requirement alterations will be costly, saying: “By asking us to report in more depth we are moving into fairytale land. It is bound to increase cost and I am not sure it is even relevant.”
However, he also thinks that focusing on separate aspects of adviser costs is pointless. “We look at the different components that irritate us but it all comes back to the same thing - that the FSA has unlimited power, can do what it likes and does not have to be accountable to anyone. It seems to have taken the view that we can be milked until we are dry.”
The consensus among IFAs is that fundamental change is needed. Stevens says: “Unless intrinsic change occurs in terms of accountability, then things are not going to do anything but get worse in terms of adviser costs. The FSA is a totally unbridled monster. It sets its own agenda and its own budgets and clients will end up paying because the money has to come from somewhere.”
Bamford agrees that costs will be passed on to clients and warns that the ever increasing level of regulatory costs is not sustainable.
He says: “As long as we can continue to add value for our clients, higher costs are tolerable. What is not tolerable is a year-on-year regulatory cost increase running at five to six times inflation. At some point in the not too distant future, the cost of the regulatory system will simply become unsustainable.”