Charging ultra-low advice rates for lower-value clients risks undermining the profession’s reputation and will lead to higher compensation payouts, advisers have warned.
The Treasury launched the Financial Advice Market Review in an effort to tackle the growing advice gap caused by the RDR and firms increasingly focusing on wealthier clients.But advisers say firms that charge too little are putting the profession at reputational and financial risk.
Rowley Turton director Scott Gallacher says: “I can’t see a professional adviser doing a pension freedom case in less than three hours.
“You’ve got all these people working from their back bedrooms scratching a living as an adviser. Fair enough if that’s what you want to do, but they are not taking on any concept of the future liabilities or the genuine cost and value of that work.
“They are arguably undercharging for it and if they’re not making enough money to cover the true cost of that advice, what happens when it all implodes? Does the company just fold and drop all that liability back on to the FSCS?”
He adds: “We have a moral obligation not to dump our liabilities on to our peers.”
Informed Choice managing director Martin Bamford says: “It’s still pretty common that advisers say ‘yes’ to everything, charge very little and effectively cross-subsidise with the very big cases where they charge a lot more.
“It’s a dangerous approach, if you’re not commercial with every single client it’s negative for our profession. It sends the wrong signal and says we are not businesses and not pricing appropriately, not only at the small end but the large end too.”
However, Ringrose Grimsley IFA Victor Sacks, who charges 3 per cent up to £100,000 and 1 per cent thereafter, says he is happy to accept clients with very small pots.
He says: “I want to be the go-to guy for my local area. I have people calling me up with £5,000. And I say, ‘OK, I’ve got a model portfolio solution for you. I can’t spend too much time on it but you’re five minutes away from me, I’ll come over and do a complete fact-find in an hour. We’ll do a risk profile questionnaire, capacity for loss and email over everything and we’ll go from there’.
“I fail to see why that model can’t work.”
Sacks adds wealthy clients are as likely to complain about advice as less wealthy customers.
He says: “Any piece of business we write is the next one that can hang us. It’s the nature of the beast. Just because someone has £1m to invest and has it with you for years doesn’t mean they are less likely to sue you. I’ve had people at both ends of the spectrum.”
Last week Money Marketing revealed that the Financial Services Compensation Scheme could be redrawn as part of its 2016 funding review.
It will debate scrapping its current model and consider alternatives such as charging advisers on the risk profile of their businesses.