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Advisers warn undercharging risks higher FSCS bills

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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.

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Comments

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

  1. If you can manage to make any profit at all on 3% of £5,000 Mr Sacks, you must have some magic formula that eludes the rest of us. That said, things might be considerably better were the FCA to sanction a Simplified/Streamlined advice process based on just Proposition, Costs, Risks, Tax (and perhaps Accessibility). That could be covered in just a couple of pages, which is what Rory Percival says he’d like to see. Yet, within the present framework, it simply isn’t possible. For its part, all the FCA does is make vague noises about simplified advice but, in practice, it just CANNOT bring itself to give such an idea green light. It might not be perfect ~ what is? ~ but it would surely be a very great deal better than what we have now and help bridge the advice gap. I would also suggest that it’s what very many people would actually prefer to the mountains of verbiage through which they have to wade under the present system. Certainly, that’s what my clients regularly tell me.

  2. I’ve heard it all now! Some IFA telling others that low cost operations are doomed to failure. Some of us don’t need plush offices and a multitude of support staff in order to advise our clients. Victor has it just right in my view, if something takes an hour or two and you want to charge the client £150 then that seems about right to me. Perhaps not the best of clients, but they may have wealthier relatives and friends or might just be “nice” people you are happy to deal with. Most IFAs are indeed “cottage industries” – it’s either that or charge ridiculously high fees for simple advice. it really is a case of horses for courses – complex cases cost the client more. Experienced IFAs can appreciate the amount of work involved and charge accordingly.

  3. There are a numeder of big failing and assumption that totally blows this argument out of the water.

    Firstly is that the advice provided is incorrect, which is the only reason the liability will fall to the FSCS.

    We have an office, support staff and charge less than most. There is a level or cost for advice I will not go below based on profitability, but never the less it is then down to client to pay or not to pay. We as a business have seen an opportunity to provide quality advice at a reasonable cost to areas many other advisers will not work with. This means higher volume but also means less complicated cases.

    If you then factor where in the UK you are advising the costs will very vastly. My clients would not pay London or South East prices as frankly the earnings and salaries are very much lower.

  4. As a key contributor to this article I’d like to counter a couple of the comments made.

    I would disagree that the advice has to be incorrect for the case to ultimately fall on the FSCS. It only has to be judged incorrect in the future by FOS to have been incorrect and it would be naive to presume that not one of the cases being written today, especially pension freedoms cases, will be judged to be incorrect in the future.

    For example, I can’t imagine that all the endowments that were ultimately judged to have been missold were incorrect when the original advice was given. It’s only when returns fell and people lost out, that they started to complain.

    That said, even if the original advice, and the compliance, is absolutely sound it doesn’t mean that there will not be a complaint in the future, especially when those having utilised pension freedoms have exhausted their pot, and in that case there are significant costs in just responding to the complaint, informing PI insurers and potentially dealing with FOS.

    I would also dispute whether small pension freedoms cases necessarily less complicated. I would suggest with a lower capacity for loss, less financial resources, possibly less financial education and the issue of state benefits these cases might well be more complex than someone with a nice final salary pension and £100,000 personal pension.

  5. Well.. Let’s clear a few things up. I’m happy to run the charging structure I run. My office is in my back garden & I have no other support staff. I am very fortunate to have low outgoings & can reach out to help those that up until recently, would have only had a bank or building society to go to for financial advice. I don’t just deal with £5k investors, in fact my mainstream client is a business & it’s owners, but I’m happy to see & talk to those with modest savings and offer a solution, rather than no solution at all.

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