Beware of handing out any form of business guidance to IFAs – especially if you are a regulator. This is surely how FSA head of investment intermediaries Linda Woodall must be feeling this week after wondering aloud why IFAs cannot offer a selection of their clients some free financial advice.
No sooner had Woodall’s words, uttered at a recent Personal Finance Society RDR seminar in London, been reported in Money Marketing than her remark was slammed as naive by angry advisers.
At the last count, there were upwards of 70 comments on the MM website, all or almost all of them extremely hostile towards Woodall. One or two were unkind enough to publish details of her brief online CV and presumed salary to try to prove she had “no clue about small firms needing to work their butts off in order to stay afloat”.
To claim that a management career in manufacturing and accountancy precludes her from understanding the IFA sector smacks of desperation.
Rather than caricaturing her argument to the point of absurdity, let’s try to understand what she was getting at, shall we?
Woodall remarked that some IFAs had approached her and said they currently provide a free service to clients with “simpler needs”. They are worried they will not be able to make a profit doing this from now on. Her response was that it might be possible for firms to offer a form of cross-subsidy, so some clients could benefit from a limited amount of free advice.
What is so astonishing about that? Contrary to many of the comments on Money Marketing’s website, there is no ban on cross-subsidising services to clients after the RDR. Advisers are perfectly free to charge clients what they want.
Indeed, in areas where the issue of cross-subsidy is of particular importance – for example, in the field of corporate pensions, where contribution levels among scheme members is likely to vary – the FSA is quite happy to see a degree of deliberate cross-subsidy.
So, for example, the FSA’s consultancy charging working group’s review of the corporate market in March specifically said a consultancy charge proportionate to contributions or member funds could be preferable to a flat charge which penalises lower-earners.
The second issue is that of profitability – is the provision of a free advice service, at whatever level, consistent with an IFA’s need to make money from a client he or she sees?
On the face of it, no it is not. If that were the only service the IFA provides and if a payment the implementation of product purchase decisions is not possible, then clearly the adviser would not be making any money. But that is not what the RDR is saying either.
Nor is the RDR saying an IFA cannot offer some form of free advice either as a “loss-leader” service targeting new clients who want an initial meeting to see how the adviser might deal with their financial need or paid for out of the trail commission earned from an existing client’s investments.
In other words, there are a variety of ways in which an IFA might decide how to approach how and when to offer “free advice”.
Will it always be profitable to do so? My own direct experience is that it depends. On a number of occasions in the past 10 years or so, I have been asked by IFAs and others to work with them on their brochures or websites.
On each occasion, I spend time looking through my prospective clients’ material and then meet with them. I suggest ways forward and an indication of what I can do for that business as well as what my charges are by the hour or by the day.
All that is “free” and the client is at liberty to hire me or otherwise or they can hire someone else, using my comments as a potential template.
Sometimes it works and I get the job. At other times, it does not. My charges reflect that, as does the fact that in many cases I choose to work pro bono for people who genuinely cannot afford my services at all. There is nothing in the RDR to prevent IFAs from working in a similar manner.
Which is why it strikes me that all the abuse visited on Woodall’s head reflects a deliberate misunderstanding of what she meant and what is possible under the RDR. The fact some advisers are forced to scrape the barrel in the way they have done is a sign of the desperately weak arguments they have left in the run-up to 2013. It does not bode well for them.
Nic Cicutti can be contacted at firstname.lastname@example.org