JP Morgan warns adviser charging could lead to products push
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The move to adviser charging could push firms to encourage more product sales so that they can avoid charging clients VAT, according to JP Morgan Asset Management.
In a report on adviser charging published today, JP Morgan warns firms who have previously operated on a commission-only basis will now have to consider VAT implications when they move to an adviser charging model.
Advice given to a client which does not include a regulated product recommendation is liable for VAT, while arranging products for a client, also known as ‘intermediation’, is exempt from VAT.
J.P. Morgan says: “The main challenge for advisory firms is to be able to show a tax inspector in clear terms what is billed as advisory work and what is billed as implementation. This underlines the value of a charging model where ‘advice’ and ‘implementation’ activities are charged for separately.
“However we are concerned that the VAT rules, as they currently stand, could have the unintended consequence of encouraging firms to execute product transactions, which is sharply at odds with one of the main intentions of the RDR, namely to remove sales bias from the advice process.”
Firms are only liable for VAT once their VAT-able turnover for the previous 12 months exceeds a certain threshold. The VAT registration threshold for 2011/12 is £73,000.
Income from VAT-exempt work and trail commission for business before 2013 should not count towards the £73,000 limit.
The report also includes research on attitudes to adviser charging based on responses from over 2,000 consumers. J.P. Morgan found that the average one-off cost that respondents were prepared to pay for a complete financial planning review was £371.
Advice reviewing all investments and pensions was expected to cost £324, while Isa advice was expected to cost £258. Advice on pensions was expected to cost £256.
IFA firm Affluent Financial Planning, profiled in the report, put the cost of a financial planning review and report at a minimum fixed fee of £750, paid upfront. Concept Financial Planning, also profiled, meets the cost of producing a client proposal, and charges an hourly rate of between £90 and £250 an hour, charged on a fixed fee basis, for full recommendation and implementation.
JP Morgan says: “Consumers either admitted to not knowing what financial advice should cost or significantly underestimated what the price of certain tasks should be.
“We would attribute the fact that consumers said they would be willing to pay £371 on average for a full financial planning review to a lack of understanding of what is involved in the advice process as much as resistance to paying a fair price.”
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Readers' comments (12)
WTF | 16 May 2011 1:02 pm
Julian Stevens
Norm d’Plume
Incompetent Regulators Awards Team
PD Off IFA
Exasperated me
Don’t worry guys. I’ll pick this one up for you.
Whinge whinge FSA so nasty whine whine failing their statutory objectives bleat bleat run roughshod over us poor little IFA’s sob sob in their Ivory Towers sniff sniff snouts in the trough moan moan….AND WHAT ABOUT THE BANKS???? WHAT ABOUT THE BANKS??!!??
Hopefully covered everything….
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Anon | 16 May 2011 1:26 pm
WTF | 16 May 2011 1:02 pm
Interesting article and well worth the read.
WTF? I don't understand your retort????
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Phil Castle | 16 May 2011 1:36 pm
@WTF - I feel left out now!
Anyway, my take on this is that as a directly regulated firm with just me as the only authorised adviser in our let firm (everyone else is admin), it may make me think twice about taking on another adviser or merging with anotehr firm to achieve economies of scale as w'd definately have to be looking at VAT then.
As things stand, as some work is intermediation and sone is not, my understading is we could potentially have up to £70k ish of potentially vatable turnover before it becomes and issue, so even if half our turnover was potentially vatable and half was non vateable, we could have turnover of about £140k before I decide to take more time off rather than have to charge VAT. Wheras if I merge, I might have to work more simply to pay the VAT man!
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Fraser Brydon | 16 May 2011 1:43 pm
all those wishing to pay VAT on a voluntary basis please raise their hands, all those wishing to complile VAT returns in their own time raise their hands, all those not thinking of finding a way to sell something to avoid this blatant profiteering by HMRC raise their hands......thought so!
Your preaching to a converted auidience!
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Anonymous | 16 May 2011 2:27 pm
It isn't blatant profiteering by the HMRC. The VAT rules have been around years and are not being changed because of RDR.
The problem (if you can call it that!) is being created by the FSA’s drive on adviser charging and the removal of commission. HMRC are happy with the way things work at present and VAT is only coming in to play because the FSA are changing the services that we are being paid for. The FSA didn't even speak to HMRC to find out the impact of the decisions they were making.
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Alan Lakey | 16 May 2011 8:26 pm
I note that the papers and blogs are regularly filled with satories about how if this happens then this will occur.
It serves to highlight that there isn't a magic spell which will transform financial services into that nirvana which the FSAs original RDR paper sought out.
How long, post 2013, before a headline reads, "Chartered planner banned" or "Highly qualified wealth manager visited by fraud squad".
It is said that truth is the first victim or war. Maybe 'war' should be changed to 'RDR'.
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Simon Mansell | 16 May 2011 10:25 pm
How can a 20% increase in consumer costs be in the consumers interests? This does rather prove the FSA statement that RDR was about giving consumers a better outcome to be total rubbish. This RDR is like a run away gravy train and the one way ticket to nowhere is costing £1.7b.
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WTF ID Outed! | 16 May 2011 10:28 pm
WTF | 16 May 2011 1:02 pm
Thanks for your comments Mr Sants.
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Anonymous | 17 May 2011 9:54 am
Oh Targets ! Misselling ! Will the industry never learn ? Here we go again !
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WTF | 17 May 2011 12:55 pm
To Phil Castle
Apologies if you feel left out. However, some of the comments you make on these boards are far too considered and contain far too much common sense. You will have to come up with a whole load of nonsensical whingeing tripe to get yourself promoted onto that little list.
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