Martin Wheatley, speaking after the last FSA public meeting, referred to a “dealing bias” – a term I had not heard. Product bias and provider bias were two of the bedrocks of the RDR and the reason for the abolition of commission; dealing bias appears to be one of the unintended outcomes.
It seems many IFAs have simply replaced commission with adviser charging. Why is anyone, including the regulator, surprised by this? Surely it was obvious that if an IFA was charging 3 per cent plus 0.5 per cent in the commission model, post-RDR they would choose the route of most efficiency for their business, and possibly their client, by continuing with 3 per cent plus 0.5 per cent adviser charging.
It seems Wheatley is concerned that IFAs are only getting paid if their clients buy a product. But if that is the model the intermediary wants to work with, why is it wrong? The bundling of advice and implementation, where the adviser is remunerated only if the client buys a product, has been around for decades. It is valid if it works for the consumer and the intermediary. It may not be the model used by all IFA firms – some of whom unbundle the work, charging predominantly for the advice work and less for the implementation work – but it is still the most common method of pricing.
With all the feedback that the FSA, and now the FCA, had from the authorised and regulated intermediaries, surely this outcome should have been obvious long ago. Is the main concern that the charge is expressed as a percentage of the money to be invested or is it that this charge is payable only if deducted from a product? Nothing is fundamentally wrong with expressing price as a percentage. It is a common approach across many services.
Some of us may prefer the certainty and clarity of a fixed price for services – a project fee rather than hourly rates – but that does not make percentage charging wrong.
But what if Wheatley is right for the wrong reasons?
Dealing bias might somehow be worse than product and provider bias – although I recall there was scant evidence of the existence of both of those.
What if he is right because the consumer places the most value on advice and planning and the least value on product solutions that might come as a result of that advice? I am not saying that the product solution has no value; just that it has less value. This may be a little difficult to accept where advice is dominated by a product solution. But if correct, perhaps Wheatley is right and the charge the intermediary makes should be skewed towards advice, payable even if there is no implementation of a product.
As long as dealing bias is properly considered and explained to the consumer, adviser charging expressed as a percentage should do little harm. Where advisers claim to provide advice for free and their remuneration is contingent on a product sale, we have made little progress as a result of the RDR and Wheatley is right to raise these issues.
We only become a profession when we break the link between product sale and remuneration.
This latest regulatory pronounce-ment could help with that transition, as brutally painful as it will feel for advisers still wedded to the old product sales mentality.
Martin Bamford is managing director of Informed Choice