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Are advisers going too far on ongoing suitability?

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With a wide-ranging review in full swing, suitability is the watchword for advisers right now. While advisers may have gone to great lengths to make sure a new client has the right plan for them, how can they make sure it is still suitable next week, next month or next year? If there is more work to be done, are advisers charging appropriate ongoing fees for continuous servicing?

Reassessing the regulations

According to FCA data released in October, the average ongoing adviser charge ranges from a minimum of 0.5 per cent to a maximum of 1 per cent, compared to 1 per cent and 3 per cent for initial advice. For firms using hourly rates, ongoing rates were between £150 and £190 an hour, roughly in line with initial charges.

The FCA said neither the ongoing nor initial charges were significantly different between independent and restricted firms. Hourly rates were higher in some regions than others, however.

In the Financial Advice Market Review, the FCA notes that, under its rules, “advisers can only take an ongoing charge if they are providing an ongoing service”.

Like any adviser charge, however, there is no upper limit for ongoing fees as long as they are transparent. There is also no formal requirement to make sure a recommendation is still good at any point after it is made.

Former FCA technical specialist Rory Percival says: “Bear in mind what the regulations expect; the suitability requirements apply at the point of sale. There’s isn’t any ongoing requirement to check an investment you have already done for a client is still suitable.

“However, the firms may put that requirement on themselves and many of them do. The nature of ongoing service is such that they meet once a year to see whether investments are still appropriate.”

Other regulatory experts urge advisers to put effort into ongoing suitability, even if there is no FCA requirement to do so, because the Financial Ombudsman Service may find against an adviser for failing to take into account new information or not carrying out a transaction quickly enough.

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National IFA Gale and Phillipson compliance officer Jon Dibble says: “Not doing ongoing suitability checks doesn’t stand up. The FOS will hold you accountable for that. Where you have taken longer-term remuneration, go back and ensure ongoing suitability. If the client has paid for it, you should do the work.”

Dibble says Gale and Phillipson had a case where a client’s ongoing charges amounted to only 64p a month, but he still wanted to check at least some attention had been given to the portfolio. It also recently reduced a client’s ongoing advice charge because their circumstances changed and they would not need as much ongoing attention.

Dibble is talking with advisers across his firm to form a more standardised corporate view on how to approach ongoing suitability.

He adds: “We have got a responsibility to provide the client with a service. If you didn’t provide the service, you should’ve told the client that.

“If a client is paying 1 per cent versus 0.5 per cent they should expect more for their money. That’s fair – you don’t take money off people if you are not doing the work.”

Adviser efforts

The amount of time an adviser puts into ongoing monitoring of their service will vary from firm to firm.

Susan Hill Financial Planning director Susan Hill charges an ongoing fee of 0.5 per cent, but does not think this covers the work involved. She says: “To be honest I don’t charge enough for the servicing people are getting. On a £100,000 pot, 0.5 per cent is £500 a year, which is £40 a month. For that I’m doing a whole review, including a deep meeting, which then gets written up and is basically another suitability report. I also ask them to do a personalised expenditure and attitude to risk exercise because quite often when they have worked with me for a while they get more adventurous because they’ve seen the results. I look at their needs because there’s no point somebody trying a more adventurous risk if their needs are no more adventurous.

“That all takes time. I also do annual due diligence on platforms and models, so there is a lot involved.”

Hill says she would like to see advisers move towards higher ongoing charges, but is concerned this would turn clients towards the cheapest advisers, regardless of quality. She says: “The historic half a per cent for ongoing advice is simply what was paid in commission. Unless we all increased fees I’m not sure the market would take it. Clients look at the fee but don’t know what the adviser is going to be like. It’s really hard to say to someone ‘I’m worth 0.75 per cent’, because they think you charge what the man down the street charges so you must be the same.”

Addidi Wealth managing director Anna Sofat says in her annual reviews with clients, as well as the performance of investments and pension funds, she will run through what the ongoing charges have been for that year’s service. Underlying targets and client objectives are also reviewed, as is platform appropriateness.

Where you have taken longer-term remuneration, go back and ensure ongoing suitability. If the client has paid for it,
you should do the work

She says: “It’s not just about tweaking things and confirming something is right. It’s about whether the strategy we have for them to get them to a point in retirement or an income stream before that is still on track. Do we have to adjust for that?”

Some advisers are moving towards half-yearly or quarterly reviews, but Sofat says reviews do not need to be annual for clients with simpler needs. She says: “If you are taking fees that has to be justified by doing reviews looked at from the client perspective. We have clients who are younger where our fees wouldn’t be justified so we see them every two years or so.”

Percival agrees advisers can extend their review timeframes for certain clients.

He says: “Hardly anybody does periods longer than a year, but actually for some clients like young accumulators paying into a pension or Isa, there’s not much planning in there. You can just build a three-year review which can be in place unless their life changes, for example, having children or getting married. That would be quite a good service package.

“A lot of concerns are about the pace of change, but that’s technical fund selection stuff which most advisers don’t get into and I don’t necessarily subscribe to.”

Sealing suitability

Percival, who notes fund selection for most advisers is normally reviewed annually, recommends frequent email communication with clients, but says the regulator would not approve of a “negative consent” approach.

He says: “It can become a bit of a logistical pain because if the client can’t make their annual review or the client doesn’t respond with permission to do the rebalancing, portfolios can get out of kilter. Email updates would be fine. Some firms can get really high response rates when they do that. At the opposite end of the scale, you shouldn’t do something like ‘if you don’t respond in two weeks we will act’. Negative consent is not permitted.”

Even if they outsource to a discretionary fund manager, Percival urges advisers to maintain an ongoing relationship with the client as part of that to “make sure the DFM is doing the right stuff and is still the DFM for them.”

Expert view

I am very keen to promote annual reviews of clients. If that is your model then you can start to at least tailor these if a client would benefit from more frequent reviews or reviews over a longer time period.

A lot of it is about segmenting clients and thinking about what the best situation is for the client. It is wrong for firms to have a service plan driven by them when it should be driven by the client, but it is also not right to have no ongoing servicing plan at all.

Platforms and model portfolios should be providing sound investment solutions. Obviously what that does not consider is the client’s objectives, or whether their circumstances or their investment drivers have changed. As people approach retirement their attitude to risk changes so their portfolio management might change.

An advice firm’s service proposition should reflect the level of charges and what the client gets for that. The industry and our business would value as much guidance and support as the FCA can give us. We set our own standard based on what is fair to clients internally, but we do not see much of a wider framework, which can be quite challenging.

Jon Dibble is compliance officer at Gale and Phillipson

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. The client agreements we sent to the FSA with our Lonsgtop wording in 2007 I think it was included and explained that to address the 0.5% ongoing charge being insufficient for smaller cases, rather than increasing to a flat 1%, nor undertaking annual reviews when inappropriate for young earners, we agreed a 3 yearly review basis with clients and they paid a monthly retainer of under £20 per annum plus 0.5% of FUM, review frequency was then agree based on fum, so most of our clients were annual reviews, but service was ongoing.
    Its a reverse of the discount for large funds model as all pay the same retainer and the same.

    It’s worked for us, not saying it will work for everyone.

  2. The ongoing debate around the cost of financial advice continues……………because thats what it boils down to.

    When will the FCA realise that the steady increase in costs to firms is pushing large sections of the population away from financial advice because they simply can’t afford it or the cost isn’t worth it.

    There are some interesting points in this article, reviews every 2 or 3 years is something to consider especially for lower value portfolios invested in MM funds. If you are just turning up every year and saying “This fund is still a good place to hold your £50k ISA” how are you adding value to the client? However, in this example at 1.00% the adviser would be getting £500 per year is that sufficient to cover the cost of a review and all the admin around that? So we are in a situation where, even at the top end charging structure (assuming percentage based, obviously hourly rates could be different) we are only just covering the cost of an annual review. The result is we have already priced out lower valued investors and now we’re starting to price out those with what the majority of the population would consider decent savings pots.

    I don’t have the answer, I don’t suppose any one person does, but at least the industry is starting to talk about it.

  3. So it would seem that there’s no formal requirement from the FCA for checking ongoing suitability and yet the FOS would expect it. What a wonderfully clear and consistent regulatory system we have.

    • One of the reasons why I chose to go (selectively) restricted was that not only does an initial recommendation to Platform A have to be justified by comparing it against all the others out there but, so say various compliance departments, IFA’s are supposed to undertake the entire exercise all over again every year or two which, to my way of thinking, is so OTT as to be utterly ridiculous. Do clients either want or need that and do they want to be charged for it? What Cost:Benefits Analysis did the FCA undertake to justify such a requirement? None, of course. It just sounded like a good idea in theory so why not impose it on the IFA community on top of everything else? No need for any consultation ~ just tell ’em to get on and do it. Meanwhile, Arck, ArchCru, Harlequin and Connaught…….

  4. Perhaps the question should not be Are they? but WHY are they?

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