Since the FCA opened for business, chief executive Martin Wheatley has been firing off soundbites at a pace even Tony Blair would have been proud of.
Now he has turned his sights on what he calls ‘dealing bias’. It seems he does not like the way the RDR is panning out now because some advisers having adopted a fee model but, in reality, their ‘fee’ is calculated as a percentage of the sum invested. In other words, commission but given a new name.
Evidently, Martin does not like commission structures – which I find a little odd because, having just run some numbers through the FCA fee calculator, here’s what shows up:
FCA Fees for a firm with:
• £200k income = £1,749.56
• £400k income = £3,207.31
• £800k income = £6,122.80
Holy cow, Batman, the FCA is working on a commission basis.
Not only that but they seem to be charging about 0.8 per cent pa (a figure, I suspect most advisers would consider rather lucrative.
Martin’s idea is that fixed fees are better – only for advisers, you understand, not for the FCA – but he’s missing a number of salient points.
Yes, there is a risk of dealing bias but the answer lies in effective enforcement action by the regulator when they identify it happening rather than forcing hourly rates on firms. That just creates a different bias as less scrupulous firms bill for hours they didn’t work and stretch out the advice process in order to bolster the fee. I believe our colleagues in the legal profession call that ‘account padding’.
The move from pre-RDR commission to the ‘dressed-up-as-a-fee’ version was designed to address different biases altogether – product bias and provider bias – and, since the amount paid is no longer determined by the providers, I’d say it’s done it’s job pretty well in that regard.
Having contingent fees remains doggedly popular with consumers too. They understand the idea of paying something to get something. Not surprising really, since that is a fundamental ingredient of commerce. What they struggle with is the idea of paying a fee only to find their financial position is left exactly as it was when they turned up at the IFA’s door (apart, of course, from being down the amount of the fee). To the consumer, that looks like paying for nothing.
Although it clearly shouldn’t cost twice as much to receive advice on a £200,000 investment as it does on a £100,000 one, neither should the price be exactly the same. There are a number of factors that will increase the costs.
For one thing, PI costs are related to business volumes so they will rise. More significantly, try as we might to get everything right every time, advisers are human. They will make mistakes and mistakes on the £1m portfolio are likely to have much bigger long-term cost implications for the business than mistakes on the £10,000 portfolio. In essence, investment advice costs have to carry a ‘risk premium’ and this has to be factored into the overall charging structure.
Martin should spend less time trying to create some fantastical system where dealing bias cannot occur (because, as we show above, that doesn’t work particularly well) and more time identifying when bias has occurred and then punishing it accordingly (and heavily).
At the moment, he is acting like a surgeon who wants to take your kidney out just because some kidneys get infected.