Advice firms are doing well at the moment. What we do has been recognised as important and we have been busy. We are profitable and standards are high. But just how sustainable is even the best business?
Picture yourself presenting your firm on BBC’s “Dragons’ Den”.
It all sounds good to start with: a client base with high retention and loyalty, willing to pay fees on an ongoing basis. Markets have held up well in recent years and clients with long-term investments are seeing a good overall return.
And then there is the potential new income stream from those looking to release defined benefit money and who should take out an ongoing service proposition to manage their new personal pension assets.
However, those pesky dragons will want to delve deeper. How long will we remain liable for the validity of the advice we have given? Indefinitely? Alarm bells. What if those who have given up their guaranteed pensions run out of money? Will we be able to defend ourselves against claims from unhappy clients?
They might also ask about the line in your accounts relating to levies from the regulator and why it has increased so rapidly year on year. Will you explain that you and other successful firms are carrying the can to compensate for the bad advice given by lesser firms that have since gone to the wall?
I can see the incredulity already.
When you go on to say the regulator is doing little to stop the rot by identifying sub-standard firms, the response would almost certainly be :“I’m out”.
We should be worried. Firms are ploughing on with delivering advice as best they can but the fact is our sheer existence is providing an open chequebook for the regulator and the Financial Ombudsman Service.
We cannot sustain the profession on this basis. Contingent liability is a term being used in respect of client investments but, frankly, our own contingent liabilities for the continuation of the profession are equally a concern.
Do not forget that advice firms are businesses: we must be profitable to survive and, at the end of the day, it is the client that pays to cover our costs. Affordable advice has never looked so far from our reach.
We spend 15 per cent of our turnover on compliance matters – internal costs, levies and PI cover – and I can see that percentage increasing in the years to come. There must come a point where one more straw will break the camel’s back and our profession will come tumbling down. If it does, the client will be the loser.
I do not think any one of us can come up with a workable solution but together the profession, regulator and ombudsman must try to find a path through.
I have long said the regulator should talk more to the advice sector. We are at the sharp end trying to make sure clients’ best interests are protected while delivering outcomes that will meet their objectives. It is a balancing act that requires skill, empathy, understanding and integrity – and thousands of advisers have those qualities.
What we lack is clear direction about what will be considered valid outcomes for clients in various scenarios, so that we do not have the sword of Damocles hanging over us for the rest of our lives.
Carl Lamb is managing director of Almary Green