How much should financial advisers be charging for their services? And, in the new post-RDR environment, are many advisers simply substituting percentage-based remuneration, linked directly to sales, for the commissions they received previously?
I have been pondering both questions in the wake of two recent news items in Money Marketing. One reported figure from Apfa, the advisers’ professional body, states that the average hourly rate charged by financial advisers is £156, with pricing levels much the same since the introduction of the RDR.
The second story came from the FCA, in which chief executive Martin Wheatley was reported as saying that consumers have found charges given in percentage rather than cash terms confusing.
At its recent annual meeting, Wheatley indicated that the FCA’s survey of firms between February and April found a “dealing bias”, where advisers are paid only if people buy a product.
Wheatley continued: “There are some concerns about whether that is entirely compliant with the philosophy we have set out and it is something we will come back to.” The clear suggestion here is that the FCA’s philosophy is in favour of a fee-based approach.
Evidence supporting Wheatley’s argument came from a comment that appeared below the article about IFAs’ hourly rates, in which an anonymous adviser wrote that they carried out 15 hours of work on an investment by clients for which the 4.5 per cent commission worked out at £272 an hour.
If true, this is a scandalous state of affairs. It would show there are still advisers in the industry for whom the concept of treating clients fairly is anathema. But it is equally true that fees, by themselves, are not the panacea the FCA believes them to be.
Many years ago I was asked to offer assistance to a firm of City lawyers arguing a case before the High Court. The issue was one in which the expert opinion of a personal finance journalist was of specific importance to the legal argument being made to the court.
In the weeks that followed, I was asked to provide a long affidavit for the client whose case was being argued by our side; respond to a similar document from the other side; comment on the response to my original deposition; and complete other assorted items of paperwork. I also attended meetings at the solicitors’ offices in the City. Finally, I was contracted to attend a two-day court hearing, during which time I was not to engage in any work for other clients. Naturally, I was paid for this, regardless of whether the matter was heard.
As sometimes happens, the case was settled two days before the hearing was to take place. If it had not been, there is no question that the argument would have been pushed further up the legal ladder by both sides, boosting my earnings further.
Not that I was much bothered by this foreshortening of the legal battle, as I had done well out of the whole arrangement even by that stage. My hourly rate, billable in 12-minute slots, was in excess of £150 even then. This was a sum suggested by the solicitors who hired me.
After I sent in my first invoice, my contact at the law firm advised that I should be billing a minimum 12 minutes for every phone call.
This included those he made to me and even the cost of travelling to a meeting, not forgetting the cost of the cab itself, all rounded up to the nearest one-fifth of an hour. In the few weeks I provided my services to the law firm, I must have received 25 to 30 calls, each lasting less than five minutes but for which the minimum charge applied.
I will not go into details of my earnings from this work, but suffice it to say that it remains my biggest single earner of the past 20 years. The legal firm itself must have cleared hundreds of thousands of pounds for its services.
Ever since I have been highly sceptical of the argument that a fee-paid environment is the only way for financial advisers to demonstrate their professionalism.
Yes, fees are generally the fairest way of charging for one’s time compared with commissions, where payments can either grossly under- or over-estimate the amount of work involved. Fees are one way of demonstrating the absence of commission bias to a client, regardless of whether or not it exists.
But my own experience of the fee-based system as used by some solicitors is that they offer just as many opportunities for ripping off clients dressed up in a veneer of fee-charging moral rectitude.
The problem, I fear, is not that of fees versus commissions but of an institutionalised relationship with clients that is based on amoral cynicism: they are simply there to be milked dry.
Whatever post-RDR changes are introduced by the FCA, the most important must be to IFAs’ behavioural mindsets. Without it, effective regulation is doomed to fail.
Nic Cicutti can be contacted at firstname.lastname@example.org