A change as profound as adviser charging was always likely to cause some adviser firms to avoid it by pretence. They simply kept commission scales and called them fees. The FCA has clocked this, but it won’t be easy to deal with.
I’m pleased to see that Nick Bamford has acknowledged the validity of what I wrote here last year: “The actual costs of implementation today are a negligible part of the overall costs of the advice process. By far the greatest cost is the adviser’s time. Charging methods that deny this basic reality probably won’t survive the test of a marketplace where clients compare the real cash costs of advice.”
Informed Choice’s new fee structure loads more of the cost on to initial advice. Advisers who are sticking to percentage charges use some pretty weak arguments to defend them. Such as:
”The business risk increases with the sum invested.” Perhaps. But if you apportioned the firm’s PI premium on a loaded basis, with larger investments bearing higher cost, how much would this represent per client? In cash terms it would be peanuts in relation to the average fee bill.
”Clients like percentages.” Clients only like percentages because they are small numbers. As soon as you spell out that 3 per cent of £200,000 is £6,000 they don’t like it at all. So all you are saying is that it’s easier to get away with large fees if they are expressed as percentages.
”You need to charge enough to make up for unpaid-for work.” Many advisers believe this justifies high percentage charges. That’s because they haven’t got the service proposition or the courage to tell clients exactly what they will pay even if they don’t implement the advice they have paid for. In other words, they’re still thinking like salespeople rather than professional advisers.
We haven’t yet entered the new world where clients are aware of typical costs of advice in cash terms. And many advisers aren’t at all keen for it to happen. I also think the regulators haven’t yet understood the elephant steak issue. By this I mean that dividing charges into smaller bits makes it easy to charge the client more. Architects have always done this, so professionalism does not win you a cigar.
For example, an exploration or fact-find fee, an advice fee and an implementation fee – and perhaps not all advisers specify them all exactly at the outset of the process. There is plenty of scope to evade the spirit of adviser charging. Regulators and financial journalists need to do a bit more digging than they have done to date.
Part of the problem is that the FCA doesn’t want to get prescriptive about a lot of this stuff. And it’s probably right. But the professional bodies – to whom the FCA has outsourced the regulation of advisers’ professional competence – don’t have the authority to police charging methods.
I think the FCA will soon have to decide whether to get more prescriptive or to delegate this bit of the job to the professional bodies as well. I can tell the FCA’s PR department now: it will not be long before we have mischarging scandals reported in the press . Yet the guilty advisers will probably have remained within the letter of the adviser charging rules.
Better get some excuses ready for the boss now.
Chris Gilchrist is director of Fiveways Financial Planning, the author of the Taxbriefs adviser guide The Process of Financial Planning and edits The IRS Report