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Stand well back, something is about to hit the fan.

Regulation comment for advisers

23 Jul 2013

Well, it had to happen. The fan is about to be turned on and a very unpleasant mess could be getting carefully molded to hit it.

The FCA boss, Martin Wheatley says “In some cases, firms are charging a percentage of product investment, and clearly it takes away product bias in the sense that we are no longer seeing firms recommending particular products because of the payment that comes to them, but it does not take away ‘dealing bias’, because if you only get paid if people buy a product, then you are going to want them to buy a product rather than pay off debts or do something else.

There are some concerns about whether that is entirely compliant with the philosophy we have set out, and it is something we will come back to.”

There is considerable anti-Wheatley adviser anger expressed within the Internet forum ‘ether’ and for once, as a staunch defender of advisers, I think they may have not focused on the real metrics behind his words.

Martin Wheatley actually has a point.

Adviser charging by percentages of funds under management rather than time taken was always going to be sailing close to the wind in a fee only world.

Adviser intentions from Panacea research carried out with GfK indicated that some 72% of advisers would levy their charges via the product and astonishingly a significant number would not use providers who did not allow this facility- product bias?

Our latest GfK research has indicated that post RDR, most advisers are charging an initial fee of 3% of funds invested and 1% for ongoing per annum across a wide array of segmented servicing models. It may or may not be great for the consumer, but in many cases the percentage of fee quoted for a lump sum investment today is very similar to single premium pre RDR basic LAUTRO commission, around 3% I seem to recall.

As Frank Carson said “it’s the way I tell ‘em”.

So with a proposed investment plan for £250,000, the fee would be £7,500. But what would the picture be if calculated on an hourly rate?

Of course time taken does not have any formula to accurately indicate an actual duration as every client is different, but, given that the average hourly rate charged by advisers was £167 per hour, the ‘math’ would imply that the advice on a time basis for a £250k invested amount equated to 44.9 hours.

For an investment of £100,000, the fee would be £3,000, and a time basis reflection of 17.96 hours. Yet the time taken to fact-find, research, report and execute a transaction or series of them may be more than for an investment of £250k or vice versa.

This is not about professionalism by way of qualifications providing the ability to see payment by a rebrand of commission. It is about reflecting professionalism charging in the same way as other ‘professions’ (if profession creation was one of the intended RDR outcomes) and that is by charging purely on units of time.

The actual source of fee payment - either direct from the client or from the fund is not too relevant. But should it be based on time? And should it be linked to a transaction? After all, the logical conclusion is no transaction = no fee- as Wheatly implies! What then as the time taken is almost the same, a service has been rendered and payment due?

Where I do take issue with Mr. Wheatley is that after many years of progress toward an RDR world (where the FSA, as was, agreed with the concept and amounts involved when charging a percentage of funds under management) he could be sending strong signals that this new regulator does not agree that this type of charging should continue and we should prepare to hear that stable door slam soon.

I have very strong, cynical suspicions that the FCA is wanting to find yet another way to get rid of advisers from their world by making it impossible for them to remain in business as the imposed income reducing possibilities of RDR cannot ever match the increasing and varied calls of cash from the regulator, FSCS and the FOS.

And where is the consumer in all this? Research findings to be released soon would suggest that there is a significant reality gap between what advisers think consumers will pay for advice and what consumers actually think.

Not a good outcome if advice for all, but at a cost, was the intention.

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