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Carl Lamb: Will the advice sector still exist in five years’ time? 

I have recently completed training to become a certified money coach: it is an area we are developing to complement our traditional advice service. One of the exercises is to imagine you are floating in a small boat through time. We ask you to consider where you want to land and what you might find when you get there.

It is a revealing process but what if we were to use the technique to think about our profession?

Many column inches have been dedicated to the increasing cost of regulation and the growing demands on an advice firm’s coffers. Although we are all busy, I rarely meet a principal not worried about the future. My own recent experience with professional indemnity cover is a case in point.

We last renewed our PI cover 18 months ago. Our premium was £52,000 with an excess of £7,500. We have been with the same insurer for 19 years and have a good record, so nothing has changed. When it came to renewing recently, we were quoted a premium of £55,000 for the next 18 months but with an excess for defined benefit work of £15,000.

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We took our requirement to the market to see if the quotation stood up against its competitors and were shocked to find an alternative provider wanted to charge a £100,000 premium for just 12 months of cover.

I firmly believe we are at a point of great risk for our sector, so I should not have been surprised at the level being quoted. The next year or so will be critical in terms of the number of issues brought to the attention of the Financial Ombudsman Service; that will determine just how dramatic a rise we will see in premiums when we next renew. Recent figures suggest it will see as many as 1,800 cases in 2018/19 and it is safe to assume many of those cases will be related to DB transfers.

Can any of us survive the consequences of the DB transfer bubble? If you had to shell out £100,000 for PI cover tomorrow, could you find the money and continue trading under capital adequacy rules?

And that is not the whole story. Advisers are concerned about the way the FOS reaches its decisions and about a bias in favour of potentially unsubstantiated anecdotal evidence from unhappy clients over the properly documented evidence of the adviser. We are all making huge efforts to collect and store evidence but there is little confidence in this being given proper consideration in the long run.

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This is a dilemma for good advice firms committed to their clients’ best interests. On the one hand, there are good reasons for some to consider a DB transfer. On the other, a number of people are getting insufficient and ill-considered advice on them. There are still some rotten apples around.

So what should the profession do? Hunker down and refuse to advise on anything that poses a business risk? That might reduce the number of cases that reach the FOS and help keep PI premiums in check but would it be in clients’ best interests?

We must continue to allow clients to consider every suitable option. We just need clear, consistent guidance from the FCA and the FOS on what they deem to be suitable, so we can do so without the risk of it coming back to bite us later. Managing those risks will be critical to being able to afford PI cover in the future.

Carl Lamb is managing director of Almary Green

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. The question is what will be left if Brexit goes badly? So at present it’s a bit early for this sort of question.

  2. Perhaps a backstop on carrying the liability for advice would help lower the PI premiums.

  3. The issue that causes the greatest concern, pushes PI cost up is the FOS not regulation.

    The FOS should be bound by UK law, not what they think happened. They support jelly fish (no brain) consumers who decide to complain as they did not get the result they wished. No legal long stop is seeing cases being brought for DB transfers transacted some 20 years ago. So, clearly that client had not reviewed it since or has noticed the transfer values are much higher today. Most likely being pushed on by some no win no fee claims company.

    It would be interesting to see how many DB transfers would make a claim if instead of an additional lump sum to manage poorly, they HAD to purchase an annuity with 50% spouses benefit.

    Advisers have always lived with these fears, most do not materialise. There will always be the bad apples, but at what point do you hold the consumer accountable for their actions, especially when it is clear they have been misleading, and present them with a bill.

    When it cost you nothing to complain and no consequences for your action, why would’nt you lie and state the Jelly Fish defense.

  4. I am afraid that this article does not ‘float my boat’

  5. For most small practices, a PII premium of £55,000 would, of course, be crippling but, for it to be meaningful, such a figure needs to be set in context of turnover. If, for example, Almary Green’s turnover for the period in question (18m) is £1.5m, a premium of £55,000 equates to a rate for 12m cover of 3.67%. This, though irksomely high, is not so high as to imperil the sustainability of the business.

    So what is Almary Green’s annual turnover?

  6. 5 years time ? personally I don’t think there will be a great deal of difference, but we will see a more shrinkage both in adviser numbers and experience.

    Costs will continue to increase at an alarming rate with the regulator staying on the same trajectory of micro management and filling hypothetical voids with more rules, exams and brick walls.

    As for PI…. well I still believe it needs to be ditched and we equitable fund the FSCS, based on risk, complaints, product and turnover.

    I also think the world will be vanilla, (its happening now) advisers (if they have any sense) will avoid risk both from a product perspective and for personal preservation.

    Oh and of course, access to advice will become harder, it will either be to expensive or you wont have enough capital for the adviser to engage.

    The one area that will increase (sadly) because of the above, is the scams and miss-selling, we are seeing this already, its easier, quicker and more cost effective to do the wrong thing than it is to do the right.

  7. Nicholas Pleasure 25th September 2018 at 3:16 pm

    As the owner of a small advice firm I don’t believe that we will exist in five years time. MiFID II is a regulation that we cannot fully comply with and yet more regulation is coming. Our costs are becoming so high that if we pass them on to clients there will be no point in them investing.

    It’s no secret that the FCA wants rid of us. Making us follow the same regs as the big boys is the way to do it.

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