A retiring IFA recently sold his practice to a well-known national wealth manager. When it started undertaking its reviews of clients’ planning, one client was surprised enough to seek me out. I undertook my own review and concluded although his Isas and pensions (£450,000 overall) should be updated and refreshed, the basic structure was perfectly sound, flexible and appropriate: certainly no need for big changes or costs.
The incoming adviser, however, had different ideas. To start with, everything was to be moved to its preferred platform. I use various platforms but, in this case, I did not see how the change benefited the client. Next, the whole portfolio was to go into just one relatively untested fund. A good multi-asset, multi-manager fund can give a decent spread but diversification should mean more. One fund is still the creation of one investment committee.
But what really made the client’s eyebrows hit the ceiling were the charges: £500 for the review, £13,500 (3 per cent) for making the changes and then £4,500 (1 per cent) a year from then on. If you are going to charge a first-year fee of £18,000, you had better be delivering some truly world-class benefits. However, with very few discernible benefits in the advice, my dismaying conclusion was that, once again, a client was simply being taken advantage of.
But there is another intriguing point. Adviser firms typically sell for three times the annual income, so on £450,000 (assuming historic trail of 0.5 per cent) the retiring IFA might receive £6,750 for this client.
Presumably the IFA knew what was going to happen to his clients and so the question arises: if he thought it was acceptable for his clients to pay such high fees for these changes, why did he not do it himself? Not only would he double his £6,750 to an impressive £13,500 but he would also double his yearly earnings.
But he did not. Instead, he sold out in the knowledge the new owners would immediately scoop up £2 for every £1 he received. That means once they have paid the outgoing IFA his £1, the new owners have effectively been handed a free business. Why would any financially literate business owner do that?
My suspicion is that, like me, he did not really believe it was justified to exploit his clients like this and that is why he had never done it himself. The fact he then allowed it to happen under the new advisers could be for many reasons. Perhaps he had no other choice financially; perhaps he was pressed by family problems or ill-health. We will probably never know.
But we do know that being an IFA is all about trust and when we come to pass over the reins, we should honour the client’s trust by taking just as much care as we have done at every other stage.
I know balancing ethical duties and commercial realism is easier said than done but, at the very least, we owe it to our clients to pass them to somebody we trust in turn. Hopefully, that will be somewhere they will not be hurried into an entirely new model involving major costs. At least that way they would have breathing space to take stock.
Scott Gallacher is director of Rowley Turton