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Nic Cicutti: What was wrong with Linda Woodall's free advice views?

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Beware of handing out any form of business guidance to IFAs - especially if you are a regulator. This is surely how FSA head of investment intermediaries Linda Woodall must be feeling this week after wondering aloud why IFAs cannot offer a selection of their clients some free financial advice.

No sooner had Woodall’s words, uttered at a recent Personal Finance Society RDR seminar in London, been reported in Money Marketing than her remark was slammed as naive by angry advisers.

At the last count, there were upwards of 70 comments on the MM website, all or almost all of them extremely hostile towards Woodall. One or two were unkind enough to publish details of her brief online CV and presumed salary to try to prove she had “no clue about small firms needing to work their butts off in order to stay afloat”.

To claim that a management career in manufacturing and accountancy precludes her from understanding the IFA sector smacks of desperation.
Rather than caricaturing her argument to the point of absurdity, let’s try to understand what she was getting at, shall we?

Woodall remarked that some IFAs had approached her and said they currently provide a free service to clients with “simpler needs”. They are worried they will not be able to make a profit doing this from now on. Her response was that it might be possible for firms to offer a form of cross-subsidy, so some clients could benefit from a limited amount of free advice.

What is so astonishing about that? Contrary to many of the comments on Money Marketing’s website, there is no ban on cross-subsidising services to clients after the RDR. Advisers are perfectly free to charge clients what they want.

Indeed, in areas where the issue of cross-subsidy is of particular importance - for example, in the field of corporate pensions, where contribution levels among scheme members is likely to vary - the FSA is quite happy to see a degree of deliberate cross-subsidy.

So, for example, the FSA’s consultancy charging working group’s review of the corporate market in March specifically said a consultancy charge proportionate to contributions or member funds could be preferable to a flat charge which penalises lower-earners.

The second issue is that of profitability - is the provision of a free advice service, at whatever level, consistent with an IFA’s need to make money from a client he or she sees?

On the face of it, no it is not. If that were the only service the IFA provides and if a payment the implementation of product purchase decisions is not possible, then clearly the adviser would not be making any money. But that is not what the RDR is saying either.

Nor is the RDR saying an IFA cannot offer some form of free advice either as a “loss-leader” service targeting new clients who want an initial meeting to see how the adviser might deal with their financial need or paid for out of the trail commission earned from an existing client’s investments.

In other words, there are a variety of ways in which an IFA might decide how to approach how and when to offer “free advice”.

Will it always be profitable to do so? My own direct experience is that it depends. On a number of occasions in the past 10 years or so, I have been asked by IFAs and others to work with them on their brochures or websites.

On each occasion, I spend time looking through my prospective clients’ material and then meet with them. I suggest ways forward and an indication of what I can do for that business as well as what my charges are by the hour or by the day.

All that is “free” and the client is at liberty to hire me or otherwise or they can hire someone else, using my comments as a potential template.

Sometimes it works and I get the job. At other times, it does not. My charges reflect that, as does the fact that in many cases I choose to work pro bono for people who genuinely cannot afford my services at all. There is nothing in the RDR to prevent IFAs from working in a similar manner.

Which is why it strikes me that all the abuse visited on Woodall’s head reflects a deliberate misunderstanding of what she meant and what is possible under the RDR. The fact some advisers are forced to scrape the barrel in the way they have done is a sign of the desperately weak arguments they have left in the run-up to 2013. It does not bode well for them.

Nic Cicutti can be contacted at

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Readers' comments (22)

  • No it does not bode well for them which is why a very large number of firms will collapse in 2013/14. That in turn produces massive customer detriment, a loss of confidence in the whole sector and a concentration of levies/regulatory costs on the few that manage to remain. Whilst RDR has merits, the way things are going to pan out will quite probably be a disaster.

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  • Nic, to be fair to 'the 70', I think the point they are trying to make is that Linda's comments almost suggest that's what they should do rather than the industrys long standing proactice of offering 'free' advice when it suits them to do so, rather than some level of compulsion.

    In the same way you describe soliciting work and the 'free advice' you may give, that is your call as is your right. It also seems to fly in the face of the TCF principles driven very hard by the FSA these last few years; in that cross subsidy is unfair on the client paying the 'higher fees'.

    I think it is frustration at her comments and the fact she represents a side of our industry that seems to constantly shoot itself in the foot, either by a lack of joined up thinking or simply one department contradicting another. Or does she honestly not understand what she is talking about!?

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  • A lot of the problem for those IFAs that will go out of business is that are just not used to talking to clients about how much they charge for their services. In most cases, when these IFAs do their client sgmentation exercise they will find out that cross subsidy is already happening. 80% of their income will come from 20% of their client bank. Has always been and will always be thus.
    The FSA are not telling IFAs how much they can charge for their advice. The market will do that as it does for all those advisers that currently charge fees. The learning experience that most IFAs will need to go through is not how to charge fees, it's how to add value to their clients situation. If you can prove that, the fee can always be found.

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  • I can't really see what the problem is here. Let's say I have 2 clients in the same area. Client 1 has a large investment portfolio with IHT/LTC needs and a review meeting takes 2 hours for which I receive an annual fee of £200.00 Client 2 has a smaller portfolio and no other needs. Review meetings take 1 hour for which the fee is £100.00 If I were to visit client 2 in isolation it might cost me more than I receive as a fee (petrol, salary etc) but if they live reasonably close to one another, I have reviewed both clients with one set of costs. As I arranged to meet client 1 in any case is that client really offsetting the cost to client 2 even if the annual fee for client 2 was £20.00??
    The argument would only stand if I was to make a special visit to client 2 and that visit resulted in me being out of pocket. I'd rather work in this manner and provide an ongoing service to clients than leave them with either no ongoing service or god forbid passing them onto the banks.
    Client segmentation could be arranged geographically as well as profitably as long as everyone is happy with the arrangement.

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  • Fairness is subjective: one man's fair is another man's unfair.

    Under TCF the FSA has always said in effect: defined service for a defined price. They have never regulated as to quantum.

    They have also never said that if your client agreement says £300 per hour you can't work for free for some clients either now or in the future.

    All the FSA is now expliciting stating is something that has always been the case - in a post RDR world cross subsidy is OK.

    Whether that is fair is probably depends on your point of view. Whether you can make any money out of operating on that basis is another question entirely.

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  • The whole RDR concept is flawed because it bases IFA value on obtaining products at "Factory Gate" prices. I believe that Standard Life have already said that they will not do this and, as a mortgage broker, I have seen extremely cynical behaviour from the financial institutions that do not bode well for the future. Competition may help but I am afraid that commissions not paid will end up in the pockets of shareholders rather than those of consumers.

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  • Nic

    I am glad that you used the expression "cross-subsidy" in your article because actually I think that is what is being discussed.

    If the cost of delivery to one client is paid for by the revenue generated by delivery of advice/products to another, then it isn't free, the second client paid for it.

    I can see though why the first client thinks it is free because it cost them nothing.

    That model seems to continue to work under RDR if that is what the IFA wants to do nothing stops them doing so and I guess that is what Linda was saying?

    Your description of the way you work is a cross-susbidy based approach it isnt for free

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  • I do agree with most comments above. There is a contraction between RDR, TCF and now providing free advice and cross subsidy. If, like many others I have misunderstood that fact then surely it a failure to communicate clearly by the FSA and needs to be clarified. Until then I will not be offered 'free advice' after 2013 as I do now. It is not that I dont appreciate your points Nic or Woodalls comments. It is just that the last decade has shown the regulator to be an organisation that will bend the rules to suit its argument and even contradict itself from differing departments. Sometimes that has left businesses destroyed or severly damaged. Better to tread carefully & cautiously than accept things at face value.

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  • Nic
    Bless you, you do like to stir it up don't you.

    The issue with "free" advice and "cross subsidy" has been negated by the ban on commission, unless of course you wish us to build into our charges an element of cost for giving "free" advice and pro bono services to the public(on top of everything else we have to pay for being privileged to run our own businesses)

    The cross subsidy so often despised by the regulator under the commission system, enabled all IFAs to engage with less well of clients who needed some advice and guidance on their finances, which was not profitable and in some cases did not generate any revenue.

    Now some idiotic belief that IFAs have a duty to provide a "free" advice service to consumers who are going to ultimately be disadvantaged by the increasing costs of regulation, the totally unnecessary banning of commission on investment business, which will increase fee charges, is quite frankly naive, inherently ignorant and demonstrates a complete and utter lack of understanding of what our function is.

    We are not charitable organisations, my charitable donations are mine to make by choice, not by regulatory obligation.

    Simply put the lady making these comments needs to get from behind her desk and spend a week or two in the shoes of an iFA, not pontificate on something she has little knowledge of.

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  • Typical Ciccutti pap.

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