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Super models

Last week, I considered the fast approaching onset of depolarisation and the opportunity that this gives for advisers to reconsider the business model they operate – advice-based or transaction-based.

As you would expect, to the best of our belief, all of the advisers that we serve as our clients at Technical Connection adopt the former, some by conscious design and some just by virtue of the way they behave.

Either way, the essence of what they offer is educated and experienced advice in areas where difficult choices exist.

Many of these difficult financial choices involve tax and tax planning. These advisers will usually also implement financial transactions involving retail financial products and it is, of course, entirely possible, in appropriate circumstances, to offer a purely transactional way of doing business for some clients and for some transactions carried out on behalf of some clients.

It is also possible for the adviser to operate on a whole-of-market basis for some clients and a limited-range basis for others. This much is well known.

The point is that there is a significant amount of flexibility available. Decisions on status do not have to be all or nothing for all clients.

For financial advisers who want not only to offer advice but also to implement financial transactions, they have two potential sources of remuneration.

The first, and most obvious, is the client, the second is the financial product provider.

To date, the vast majority of advisers will have received remuneration exclusively from the product provider in the shape of commission.

Increasingly, there has been full disclosure of commission received to the client and, as a result, a growing awareness in the minds of clients that this is the way that “free” financial advice is paid for.

If there is not a fee arrangement with the client – say, with fees being offset against commission – then if no financial transaction is implemented, the adviser will get no remuneration.

As a result, some advisers will have initiated a fee-based business model as a defence against non-payment when often substantial amounts of work have been put in in designing a financial plan but then the client does not proceed with the acquisition of a financial product and so no remuneration is received by the adviser.

The “defensive” remuneration model chosen by many – but by no means all – is that where a fee arrangement is entered into with the clear proviso that the fee will be reduced by the amount of any commission received.

This, or a variation of it, may well be a model that whole-of-market advisers adopt.

To be a whole-of-market adviser, it is an absolute requirement that a fee option is available to clients.

In cases where an adviser is to be remunerated by commission (even where this commission received will be set against any separately agreed fee) then, if the commission is higher than that which will inevitably become the norm for the execution of a financial transaction with nothing more than basic advice given, it is likely that the adviser will need to clearly justify the receipt of this higher commission by the value of the advice that is given.

Where a fee basis of remuneration, subject to reduction by commission, is entered into then, in respect of the commission, two choices will, in effect, exist.

The first is to agree to the adviser receiving the lowest rate of commission payable for the mere execution of the transaction.

This would mean that the fee payable directly to the adviser would be less reduced but the value of the financial product will be less depleted.

The alternative is to agree to the adviser receiving a higher level of commission than that payable for basic transactions but this will result in a lower (or perhaps no) fee being charged but with greater depletion of the financial product. It is all very simple really, isn’t it?
Basically, the adviser has to be paid from somewhere and ultimately it is the client who will do the paying one way or another.

The VAT implications may well be significantly different, depending on which basis is chosen. Many consider it odd, even perverse, that the VAT implications of a particular arrangement may be the primary determinant of which remuneration basis is selected.

I reiterate though that it is important to bear in mind that if an adviser is to implement financial transactions and wants to choose from products across the whole market, then a fee-based option must be offered.

I will continue on this theme next week.


Standard arguments

Just when it looked like changes in ownership at the Abbey had provided an opportunity for common sense to prevail in the electronic submission of mortgage applications, an alternative has appeared with the potential to complicate things further.


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