Common sense has prevailed and the FSA has announced that the menu approach for paying for financial advice is to be adopted instead of the defined-payment system. This will help to preserve the vital role of IFAs in the UK and maintain consumer choice.
What I would like to see is a less prescriptive approach to the menu system, especially regarding the level of fees the financial adviser may charge and how commission is dealt with – retained or offset against fees – and what to do with any surplus commission.
Surely it is up to the financial adviser and the client to agree how the fees and commission are handled rather than the Government? Let the market decide.
The menu will be a document given to the client at an early stage consisting of:
An outline of the services the adviser is offering.
For independent advice, the option of paying by fee and a fee scale.
Where offered, the option of paying by commission and, for a range of popular products, the commission the adviser normally charges, set along-side the market average rates.
The FSA's aim is to reduce the potential for commission bias, make consumers more aware of the cost of advice and facilitate shopping around by consumers.
What we are not seeing publicly debated are the very real advantages and disadvantages of both methods of payment. For example, fund-based commission usually creates a win-win situation for client and adviser who both benefit from outperformance of an investment. On the other hand, if a client wants advice on buying a property and the tax implications, then a fee is clearly more appropriate.
By the way, fees are not totally free of bias either. How many times have you heard of cases where solicitors, for example, keep churning out letters and charging for each one at, say, £20 when it has only taken three minutes to dictate it? Or accountants who set the clock ticking for every phone call? The list is endless.
Surely the key issue here is whether or not the professional is adding value? If the professional is adding value, then he has every right to charge a value-based price for his services. At the end of the day, it is the client's choice whether or not to pay and he will only do so if he sees added value.
What is clear is that regulations are going to keep increasing, initial commission is going to keep decreasing, with more stakeholder products appearing. Renewal commission will probably have to decrease too. The pressure to convert to fee charging is not going to go away and higher qualifications will become increasingly necessary. At the moment, we only have a stay of execution with the menu option compromise.
In spite of all of the changes, I believe financial advisers, particularly IFAs, are going to prosper because the demand from the public for financial advice is going to increase dramatically in the years ahead.
With the current and future levels of financial complexity, tax issues, decreasing welfare state and increasing prosperity, demand for professional, quality financial advice will increase substantially.
However, financial advisers are going to need to change how they work. In order to demonstrate added value, they will need to ramp up their technical knowledge and expertise seriously and be prepared to work with a team of professionals (internal or external) such as solicitors, accountants, stockbrokers, tax consultants. They will increasingly need to specialise and be prepared to refer work to other specialists, including other IFAs.
Importantly, they will need to offer at least a menu of services, including various fee-paying options. However, in order to charge fees successfully, they will need to demonstrate their professionalism. Now professionalism is not just a matter of qualifications, experience and fee charging. It is a way of thinking and acting.
You should work at improving your systems, your office, your team and everything else. Create a professional office, then delegate. Concentrate on what you do best, working on the business, not in it.
If you still feel a need to advise clients, then concentrate on the most important ones and make sure you give much added value. An excellent way to do this is by creating a financial plan and updating it at least once a year.
The plan will be based on the client's goals and ambitions. It will usually highlight shortfalls and enable you to and keep the client on track.
There are a number of companies offering financial planning software and an increasing number offering advice on how to charge fees successfully. So take a look and make your own mind up which, if any, you favour using.
Stop calling yourself a financial adviser, independent or otherwise, you are now a financial planner.
Tony Byrne is managing director of Byrne Williams