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How far should the regulator go to allay dealing bias concerns?

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The FCA has made it clear it has concerns over advice charges based on product sales, but advisers warn the regulator may face resistance if it looks to push firms towards specific fee models.

Recent noises from the regulator about adviser charging have caused disquiet among firms, with some suggesting further intervention could be a bigger threat than the RDR.

Last month, FCA chief executive Martin Wheatley suggested “dealing bias” still exists where firms get paid only when products are sold. He cited charging based on a percentage of assets invested as an example of his concerns.

A week later, the regulator’s thematic review on RDR implementation said it considers “contingent charging”, where advisers only get paid when they buy the recommended product, to be “a higher-risk approach than a time-cost charging model, due to the need to sell products to generate revenue”. 

Speaking to Money Marketing earlier this week, following his appointment as FCA director of long-term savings and pensions, Nick Poyntz-Wright said the FCA does not intend to be prescriptive about fee models but is concerned about post-RDR charging structures which closely resemble previous levels of commission paid to firms.

Lansons regulatory consulting director Richard Hobbs says: “This is a problem of the regulator’s own making. The problem is, adviser charging is not an ideal solution. Charging someone an upfront fee based on hourly rates does eliminate various types of bias, but it also creates enormous potential inefficiency for the customer.”

Skipton Building Society’s investment advice arm, Skipton Financial Services, charges 4.5 per cent for initial advice on assets up to £150,000, and 0.75 per cent a year for on-going advice. A spokeswoman says: “We are one of an ever-decreasing pool of providers to continue to offer advice on the high street. No customer will be charged by Skipton Financial Services unless they choose to invest.”

Several banks and building societies have adopted contingent charging structures and Money Marketing understands these models were shared with the regulator ahead of the RDR. Many cite consumer research that found this to be the charging method consumers prefer.

Hobbs says: “The market has spoken. Paying twice, once for advice and then for implementing the recommendation, clearly has theor-etical advantages to do with bias, but it is not what customers want. The regulator has to live with this reality.”

Ernst & Young financial services director Malcolm Kerr says: “What happened with commission is the market started talking about it being the cost of advice, which it was not.

“It really has startled me that lots of advisers have got completely different cost bases, types of clients, volume of -clients and advice propositions, and they all seem to think the right price for those is 3 per cent plus a half.”

IFA Informed Choice previously charged an advice fee of up to £890, with implementation fees ranging from 0.5 to  2 per cent. But the firm recently decided the link to assets was wrong and now charges advice fees of £1,345 to £2,500, with implementation fees of between £495 and £895.

Informed Choice executive director Nick Bamford says firms that rely on the “speculative nature of advice” risk not getting paid for advice and then subsequently missing out on fees for implementation and ongoing advice.

Kerr says: “The driver to charging a fee for recommendations and reports may be consumers thinking they can implement advice directly and more cheaply. 

“Firms are not going to want to be in a situation where they spend hours giving advice and constructing a portfolio, and that individual then goes to an online execution-only firm and does not pay the fee. That might change the fee structures as much as any regulatory impact.”

Bamford believes the charging issue is one the regulator will certainly return to. He says: “The RDR was just the start. It was a mere skirmish compared with the battles that lie ahead.”

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Comments

There are 20 comments at the moment, we would love to hear your opinion too.

  1. Agree 100% –

    RDR – Ban Commission.

    RDR2 – Banning charges from products.

    Bring it on and we will have a clean industry.

  2. The fact is that, compared to other professionals, a lot of our time is spent doing ongoing research for clients. Accountants and solicitors typically have back-to-back appointments all day and in the meantime they do paperwork to pass on to their admin staff. We spend a lot of time researching suitable products before we can even meet with a client. Therefore an additional 30 minutes spent with a new client explaining the difference between various tax wrappers does not necessarily mean a direct loss of income like it would for a solicitor.

  3. Incompetent regulators 9th August 2013 at 9:13 am

    First thing is Wheatley should also get paid for his worth e.g. About £14000 per annum salary and no bonus + a 0 hour contract. See how long he will last!

  4. @ Richard Bishop

    Yes, and only high net worth clients with a large amount of cash savings will be able to afford and pay for advice. I assume these sort of clients already make up most of your client bank. So suddenly there will be thousands of advisers who don’t have low-to-medium net worth clients to service (because they can’t afford to pay fees from their cash) but who are willing to service your client bank for a fraction of the fees. The industry certainly will be clean though…

  5. Incompetent regulators 9th August 2013 at 9:33 am

    One can’t compares with accountants and solicitors. They deal with tax and law and the public have no choice but to use them.

    Buying financial products is a lifestyle choice and people can walk away from advice.

  6. Nope, I deal with mass market and charge fees by cash or cheque and take no on going fees.

    My average fee is 300 quid. I give advice only so I don’t do any implementation, research or paperwork.

    I do upto 3 appointments a day.

    Do the maths yourself.

  7. Consumers go to accountants and solicitors because they need tax returns completed or wills written and are quite happy to pay as they are getting something for their money. Consumer who goes to a financial adviser will laugh if you spend hours going through what they have then tell r=them dont need to do anything, but here is my accoiunt for £750 . RDR has created a nightmare for low/middle income as they cannot afford fees

  8. Incompetent regulators 9th August 2013 at 9:49 am

    @bishop

    Well that’s your model and good luck. I’ve been around 35 years and my clients like relationships that last. Not transactional work only. Horses for courses come to mind ad there is room for all including commissions. Interestingly the rest of the world will not follow RDR just take a look at Germany.

  9. A week later, the regulator’s thematic review on RDR implementation said it considers “contingent charging”, where advisers only get paid when they buy the recommended product, to be “a higher-risk approach than a time-cost charging model, due to the need to sell products to generate revenue”.

    This is exactly the same risk as being paid by commission and what RDR was supposed to address (despite there being no evidence of bias even with commission).

    Risk is relative. It’s more risky to eat an ice lolly with a stick in it than an ice cream cone (ref. ONS stats). The real and prescient risks are suitability, etc.

    At what point does the risk become acceptable? The pursuit of perfection will destroy the very thing it wishes to protect…

  10. @ Richard Bishop

    What exactly is the £300 fee for if you don’t do any implementation or paperwork? And who does your research?

  11. When I first met with my accountant I had a free 30 minutes and then the clock started ticking. This 30 minutes gave him more than enough time to discuss their terms of business and fees and then start talking about my finances.

    The FSA/FCA are so prescriptive about minimum standards of compliance in initial meetings that we would have to offer 1.5 to 2 hours free to encourage clients to disclose everything to us. This would include Terms of Business, Service Propositions, a thorough fact find and a thorough risk profiling process. Only at this point can we even start to discuss potential solutions.

    If we tell a client that they will start paying fees after 30 minutes they will rush the fact find and risk profiling, which are vitally important. This will result in more unsuitable advice and more complaints.

  12. @Richard Bishop

    Just curious as to how you give advice without doing any research

  13. @Geddy Lee

    I suspect the FCA bods reading this are thinking the same…

  14. Had to giggle (lol I think the youngsters call it these days). The article I read immediately before this one was one in Mr R Bishop says he charges £300 and does 8 appointments a week. Now his activity level has just stepped up to up to 15 appointments a week? Way to go Rich. On the assumption that you are a regulated adviser is my question to you is this. Do you charge a client £300 for the initial/engagement/factfind meeting and another £300 for the meeting to discuss in depth, a generic action plan so that your customers are clear on what they should do and then they claer off and source their own provider, product and range of funds? How do they know what type of asset classes they should be investing in, how do they know what funds will suit them? Hmmmmmmm

  15. The most interesting part of this article is Mr Bishop’s comments afterwards, as some have already said. If he doesn’t do any paperwork how does he evidence KYC?

  16. I suspect Mr Bishop is trying to get in touch with the editorial team at Money Marketing to find out where the “delete” button is

  17. There seems to be a lot wrong with Richard Bishop’s post, he gives advice but does not research or paperwork. How does he evidence the reason for his advice, how can you give advice if there is no research or proof of the research via paperwork or I guess as well a suitability letter.

    Lastly he said he gets paid via Cheque or Cash. If he is being paid via cash how can he prove that there is no money laundering issues, how can he prove the source of the cash.

  18. @ Richard Bishop:

    Bring it on and we’ll have no industry!

  19. If the RDR is to be deemed a success then the sole arbiter of value can only be the customer. It is not for us or the Regulator to determine which method is most appropriate for the client as that would amount to prescriptive regulation and market interference.

    If those advisers who believe that charging flat fees offer better value to clients than an asset backed charging structure are correct, then over time we should see all those “affected” clients moving away from the latter. This should mean that those advisers who offer the latter move to the former in order to retain those clients who clearly want better value. Of course if they don’t then they will go out of business.

    Conversely, if clients are happy to continue on the asset-backed charging structure (aligned interests being the obvious counter-argument to cries of cross-subsidy), and that they are fully aware of what they are paying, to whom, from where and for what, then nothing will change. The righteous will continue to enjoy the high-ground in their own mind, and all clients will benefit from receiving a service from their advisers that in THEIR mind is good value.

  20. If, as the FCA wishes, we are all to move away from % based charges paid through the fund how are we going to service all those clients who need pension advice?

    Forget the other areas of business. The FCA and governments constant fiddling with pension regulations and moving of retirement goalposts has resulted in many people needing qualified professional advice when they look into retirement options.

    Many of those people have pension funds in the £30 – £100k region but very little in savings outside of a pension scheme. How are they going to access the advice market? The answer is that they wont and the DIY annuity industry will take off with hundreds if not thousands of people having a lower retirement income than they need have.

    Clients need to have the choice to pay for advice in any way that they choose that they believe suits their circumstances. As long as they know the pounds and pence cost of advice what is the issue?

    @Richard Bishop
    Are you seriously saying that you charge someone £300 for you to tell them what they should do then tell them to go away and do it themselves? Have you ever had a client come back and said “I don’t understand this application process, can you help me?”. What happens then? Do you charge them again?
    If you don’t do research or implementation how do you make sure that your advice is correct and, if followed, implmented correctly? Or does that not bother you?

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