Financial advisers are always saying how much they want to attract higher net worth clients in order to make more money. Perhaps these dreams would be best left unfulfilled.
Clients who are richer than you pose all kinds of compliance and legal problems you could live without. First, they can afford to sue you and their legal advisers can bring multiple complaints against your firm to the Financial Ombudsman Service. People often become rich by not taking prisoners. That includes you.
As one adviser asked, why do rich people consult IFAs rather than stockbrokers? The answer horrified me: to obtain access to alternative funds. I have seen far too many firms and individuals who are trying to persuade me they can evade or just ignore the FCA’s position on unregulated collective investment schemes so they can bring exciting funds to their wealthy clients.
Some advisers with wealthy clients see the pound signs in the fees for funds under management then lose touch with reality and basic investment research techniques. One dodgy adviser made a good point about Ucis: “Essentially, you have to be a director of the company to know enough to recommend it.”
A life settlement fund recommended in 2008 missed the point that Americans over 65 in 2000-2008 lived on average 1.2 years longer than in the previous decade. The increase in that 10-year period was 0.4 per cent. No one can build an actuarial model to accommodate that difference.
The amount of financial damage advisers can cause is directly linked to the size of investments they recommend. Any form of alternative investment increases the risk of regulatory, FOS and legal interference. If applied to large sums, this can be fatal.
With richer customers, having your professional indemnity cover properly in place to cover all your activities, with claims amounts high enough to cope, is a basic survival strategy. Advisers must then notify anything that looks remotely like a potential claim. Even then, a bolt can come out of the blue, particularly if you do not work alone. A fellow adviser can destroy your business in half an hour.
Incorporation will one day provide much less protection than it does now. The FCA will someday regard phoenixing where the original failure was the fault of the new firm’s directors as strong evidence of a lack of fitness and propriety. While all IFAs should have limited liability, it does not protect against individual fines, prohibition orders, personal guarantees and director disqualification.
Wealthy customers can push their IFAs into doing things the adviser knows is not sensible – it happens to compliance consultants too. Insistent customer business is rarely safe or compliant and cannot be converted into non-advised just because the adviser feels uncomfortable. Also, the speed
of response required by some wealthy clients inevitably triggers mistakes.
There is, though, a bigger story. Many IFAs have large amounts of experience servicing a particular type of client in a sensible way along with systems and resourcing appropriate for this. Moving into a different market requires different client management skills and business models. Often, firms which seek these types of new fields could make much more money from their existing customers via efficiency.
This makes it easier for the firm to accept more customers to fill the time just created. It also enables the business to work with those customers it actually likes. When IFAs reach upwards financially for clients, they often leave their own social and cultural values behind.
Advocates of client segmentation often forget the financial value of efficiencies generated by work enjoyment and satisfaction. Many IFAs do excellent charity work in part because they appreciate this. Helping less fortunate clients who cannot afford to pay much may enable firms to connect with what they are really about.
Chasing clients who do not fit your business model, culture and personal style is bad for stress levels, profitability and can expose firms to the company of regulators, ombudsmen, courts and ultimately, liquidators.
Adam Samuel is an independent compliance consultant