For several months, I spent one morning a fortnight sitting on a sofa and answering queries as one of the guest IFAs on the Money Channel. One week, I was joined by a young adviser from one of the major accountancy firms. Her ability to answer anything other than the most basic of questions was conspicuous by its absence.
I was reminded of this when I was approached by an IFA which had been taken to task by the FSA over the level of fees it was charging. The implication was that it could not simply fix its fees based on costs and a measure of profit.
I have always held the view that, in fixing fee levels, a firm should divide the time spent working into its fixed costs, adding around 20 per cent for profit. The hourly rate it determines may well be in excess of the rate that many of you currently quote but that underlines the risk of charging what you think the market will bear and not what it costs to operate.
As the menu is brought into force, we will witness many firms struggling to justify their rate. One client told me I was charging double the firm nearby, to which I replied: “Yes, but it takes three times as long.”
If clients want to avoid all risk of bias, fee-based advice is the only option and they must accept a liability to cost should they accept the advice but decline to execute the purchase.
For the FSA to suggest it has the right to cap fee rates is outrageous. But when you search for evidence of rates to counter its arguments, you come up empty. It is time that we research this topic. Perhaps the FSA rules should require firms to show how they have arrived at their hourly rates. But where the costs have been accepted by the client and can be justified by the adviser, the FSA has no business in setting fee caps. If it continues with this anti-competitive activity, I think the OFT should be informed to determine whether this is a breach of the EU's competition legislation.
Where the fees magically equate to the commission that would have been paid, I agree there is cause for concern. But provided that a formal engagement letter has been issued to the client, the regulator has no cause for complaint.
When the programme ended, I asked my fellow sofasitter what rate she was charging. She told me £440 an hour. I asked whether she thought she was worth it. She said probably not but are we the ones to judge? Surely that is the province of the client and the FSA should acknowledge that.
Robert Reid is director of Syndaxi Financial Planning