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Nick Bamford: Meeting the charges disclosure challenge

Spike Milligan once said “90 per cent of statistics are made up on the spot”. Sadly, the FCA did not make up the fact that 41.7 per cent of the cases it examined for its suitability review provided unacceptable disclosure.

It will be interesting to see the real detail of the results report, although we may be kept waiting for that throughout 2017/18. I do not know why the regulator cannot just get on with it and publish some information on good and poor practice.

I guess the rule in question is Cobs 6.1A.24R. It is pretty straightforward: if an adviser charges a fee expressed as a percentage, there is a requirement to convert that percentage into a monetary amount so that disclosure is explicit. And that disclosure needs to be as early as possible.

Some might argue that clients are perfectly equipped to convert percentages into cash terms themselves. That may well be true for a few but the rules require it, so no excuses.

The FCA paper states: “Our results show the main area where there is an unacceptable disclosure is with firms’ initial disclosure, which includes costs and services”.

Noticeably, it was not about an absence of disclosure but “firms using hourly rates failing to provide an indication of the number of hours for the provision of each service” and “firms disclosing charging structures with wide ranges”.

All of Nick’s columns in one place

Finding a way to communicate fixed fees

The former is particularly interesting. Advisers charging on this basis might well argue they do not know until they have engaged with the client precisely what it is they are going to do for them and thus are unable to quote a realistic timescale.

I do have sympathy for this argument. But how difficult can it be to come up with some examples of what has been done for existing clients? Perhaps one related to a full financial planning exercise, one for at-retirement and one for investment?

It may not be precise but it will give the client a feel for the magnitude of the fee. It could also have a caveat explaining how individual circumstances might mean the ultimate cost will go beyond the example.

As to “wide ranges”, the regulatory comment seems a bit contradictory. If a firm is charging on an ad valorem basis and has a tiered pricing policy, there may well be a wide range of prices to quote; particularly if they are prepared to deal with a range of investors with a range of money to invest. You can imagine the negative regulatory comment if such a firm gave too narrow a set of figures. Damned if you do, damned if you don’t.

Price disclosure is important but so is service disclosure. The only way consumers are going to be able to judge whether an adviser offers value for money is if the proposition is fully described alongside price. One without the other is pretty useless.

As we discussed at the Money Marketing Interactive conference in London last month, there are a variety of charging methods applied by advisers. None are right or wrong as such but each is different. Our collective challenge is to communicate this to clients as well as we possibly can.

Nick Bamford is executive director at Informed Choice

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. The last review but one regarding disclosure stated that around 70% of firms failed to meet the FCA requirements. Most of those firms were conscientious and caring IFAs (quoted from FCA sources) who could not understand or relate to what was required. The fact is that many firms complied with the Handbook but not the capricious nature of the FCA feedback.
    Since that time the FCA has gone back on at least one of their requirements which in reality meant that those who failed the assessment may well have passed. According to the FCA, clients were not allowed to pay by instalments. Now they can, the FCA stating that this has always been the case and quoted the Handbook! Capricious indeed. Flexing with the political wind. Bad publicity which was unnecessary and unhelpful. Dispiriting even.
    The hourly charge problem is profound and Nick is partly right. But when the actual requirement having sat down with the client can vary in cost by a factor of 4:1 you can appreciate the problem – meeting notes and timesheets are the proof. (Even if the same investment amount is involved – go think about it)
    So, you cannot disclose prices up front especially when what the clients pay can vary from £40 per hour to £175 per hour! You cannot give an exact number of hours for each type of work. It is no more than a crude estimate.
    What you can do is very simple. Sit down with the client. Encourage them to take advantage of the free initial consultation. Find out what they want and what they actually need. Then give an estimate based on gut feel, experience, commercial judgement, client affordability etc. Cap it and point out that if it works out less, the client pays less. The risk is very much with the firm – we know! It is a win win for the client. If he then wants to shop around, he of course can do. You simply cannot assume that the client is aware, informed or knowledgeable. They need your experience, feedback and guidance. If you do not do that, there is a real risk of consumer detriment because you can bet someone will invest their £100,000 even if it is inappropriate to do so.
    Why does MM again and again give opportunities to the same, uninformed people to criticise good IFAs and not give others the opportunity to give the other side of the problem. I am fed up of firms slating other IFAs who go to great lengths to serve their clients, fully disclose costs in advance but as advisers and not order takers. It is impossible in the bastardised world introduced by the out of touch FCA to comply. But no-one gives a damn and the bad publicity continues.

    • Hi Sam

      Money Marketing gives everyone the same opportunity to express their views as you have done so here.

      I actually think that what the FCA is looking for in terms of initial disclosure is indeed what you describe as a “crude estimate”

      If we were charging on an hourly basis (which we don’t) rather than on a fixed fee basis (which we costed based on a huge amount of client cases) I would probably just play that regulatory game and offer up a range of examples.

      But sadly the regulatory focus continues to be on price and pricing mechanism rather than on value so the debate doesn’t really get advanced.

      I’m not sure why you think this is about slating other firms it’s all about understanding why the regulator believes disclosure isn’t as good as it should be.

      Why don’t you write a piece for MM about your experience of pricing on an hourly basis I’m sure it would help advisers enormously?

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