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Client churn has reared its ugly head again

Natalie Holt, journalist with Money Marketing Photo by Michael Walter/Troika

In the run-up to the RDR, churning clients was a real concern. The FSA was alive to the risk that clients would be moved into new products before 31 December 2012 in order for advisers to “bank” trail ahead of the RDR deadline.

Nowadays, there is a different name above the regulator’s door but the issues the FCA is grappling with are all too familiar.

The FCA does not use the word “churn” in its latest report on how consolidators are treating acquired clients.

What it does say is, despite seeing some good practice, “we were disappointed none of the firms assessed were able to show that clients’ needs were suitably considered. While firms focused on the commercial benefits, they did not focus on how clients were impacted by the acquisition.”

If clients are being switched into centralised investment propositions that suit the consolidator more than the client, to me, that sounds like churning.

The FCA’s language is nuanced, but what it is saying is actually quite explicit. Consolidators are failing to explain to acquired clients how their advice service will change, and that the charges will be different. Where these issues are set out it is after the event, that is, when the acquisition deal is done.

Ongoing advice charges are being taken despite no ongoing service being delivered. Deals give way to conflicts of interest where sums payable are contingent on in-house investments. Adviser pay is structured on the basis of replacement business, and repeat initial charges for advice are not being factored in.

“If clients are being switched into centralised investment propositions that suit the consolidator more than the client, to me, that sounds like churning.”

The old haunts

Though the FCA has stopped short of enforcement, the report makes for a very sorry charge sheet.

We hear stories of business plans drawn up to target assets, and long-term incentive plans based on the amount of money coming in. If we are hearing this, the FCA should be too.

We have been here before of course. Whether the discussion is about consolidators or vertically integrated firms, the end goal is the same: the pursuit of assets under advice. Where client service fits in I am not too sure.

I heard an analogy recently that the advice market is becoming less cornershop and more supermarket, with IFAs becoming more akin to high-end boutiques. Consolidation appears to be the way of the world, with no one to apply the brakes to this particular bandwagon.

I have come to terms with the new reality. But that does not mean I do not still hanker for more boutiques.

Natalie Holt is editor of Money Marketing

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Comments

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

  1. Excellent piece Natalie neatly summing up what is happing in the market from many of these consolidators. Let’s not forget that not only with the client be moved into the new firms CIP they will very often get charged an new initial advice fee for the privilege as well.

    When some will see nearly all client money being moved into their CIP you have to wonder how they can still be classed and ‘independent’ as well.

  2. Having read the FCA report I think a bit more credit is due to the consolidators (and I never expected so see myself write that phrase).

    The report also says: “Our outcomes testing of replacement business did NOT indicate widespread common themes of unsuitability.” And also: “…we provided feedback, setting out areas for improvement. All firms involved in the project have since taken action to improve their practices.”

    So there were some rule breaches – but when the FCA looked at the results of the switching advice the clients were by and large OK. The FCA told the firms what to improve and the firms (we are told) have done so.

    So no drama. Just the kind of intelligent and proportionate approach that you would want from a regulator dealing with co-operative firms.

  3. Neil F Liversidge 10th February 2017 at 8:17 pm

    These firms do exist that take ongoing fees for no service. Sooner or later the clients wise up and move to firms like ours. We don’t do ‘royalties’.

  4. At SJP, churning has never gone away. When new partners join, if they don’t churn all their existing clients’ investments and pensions into SJP products they’ll see them slip away to their former competitors. Funny how this doesn’t seem to bother the regulator.

    • I used to work for a firm who having mercilessly sold onshore IB to anyone and everyone like they were the muts nuts, regardless of age, tax status, objective, then have to advise everyone that 4% upfront to move to their new platform was the NEW best answer. The utter destruction of wealth I saw there was terrifying. (3-% commissions every 5 years with 1% trail). Mind, there new brochures sure are shiny.

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