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IFAs earn their fees

I read with some irritation Peter Amott’s diatribe about the state of the financial services industry. We are all aware that the past 20 years of regulation have cost a fortune while its effectiveness has been decidedly patchy.

Now we have treating customers fairly although this is so intangible and vague that, with a bit of luck, powers greater than the FSA will force it to be scrapped or clarified and scaled down.

The biggest problem with the FSA and its predecessors has been their inability to anticipate anything. The most serious failure has been the virtual non-regulation of the banks and Northern Rock, in particular.

Why, though, does Mr Amott cling to the idea that industry practitioners should try to detach themselves from the reality of product sales that may result from the provision of sound and competent financial advice, with part of the cost of that advice being built into the product itself?

Prospective client No. 1 agrees with his adviser that: “I need to ensure that if I die or become unable to work as a result of serious illness, my mortgage will be cleared and a cash fund will be available to help my family hold things together financially.” Solution – a product.

Prospective client No. 2 agrees with his adviser that: “I need to start setting aside money on a regular basis to ensure I have a financially secure retirement.” Solution – a product.

Prospective client No. 3 agrees with his adviser that: “I need to do something with this money I have inherited that will give me a better return than leaving it in the bank.” Solution – a product.

And so on. I support the view that prospective clients must be made aware from the start that advice and implementation are two separate stages in the relationship with an adviser and that a choice of payment method is available only in respect of the latter. Any adviser has to earn a living. Selling products is an easier way to generate revenue than pure fees, for the simple reason that most clients are happy with the cost of advice being built into the product, provided this is explained to them in terms they understand. It may not be a pure model for advice but it works. What need to be tackled are the issues of clarity and disclosure.

I recently visited some prospective clients who baulked at the idea of paying a report fee. I tried to explain the amount of work involved in researching and writing up the areas in which they had expressed interest. The response was: “You will be paid commission, won’t you?” I replied: “Not for researching my recommendations and writing them up. What if you do not proceed?” They refused to pay, so I walked away.

Five years ago, I took a business decision that I will not provide the benefit of my experience and expertise on a speculative basis. The risk of wasting my time is simply too great but commission still has its place.

As for the notion that providing best and impartial advice means steering the client towards possibly “better value” elsewhere, please do us a favour and get real, Mr Amott. That would be like a car salesman proposing that you pay him £250 for a detailed explanation and demonstration of the range of cars in which you have expressed an interest, at the end of which he tells you that a rival dealer may have the one you choose at a better price. Business does not work like that, except perhaps in some hypothetical Utopian plane occasionally dreamt of at Canary Wharf.

Who is Mr Amott to make robust pronouncements to the effect that IFAs trying to switch to fees set their rates on the basis of “previous inflated commission” and that in most cases these IFAs are not worth what they try to charge? Tell us what your hourly rate is, Mr Amott, the basis on which you have formulated it and your overheads and the rest of us can decide the reasonableness or otherwise of our fee rates.

One other thing. I review clients’ investment portfolios at least once a year and offer them a mini-commentary with recommendations for change, if appropriate. From fellow IFAs to whom I talk from time to time, this seems to be increasingly established practice. So, Mr Amott, judge ye not others, lest ye be judged thyself and found wanting.

Julian Stevens

Harvest IFM, Bristol

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