Money for nothing and your cheques for free

The just published FCA thematic review on ‘Inducements and Conflicts of Interest’, a result of last year’s Dear CEO letters”, does a lot to recognise that in the RDR world, support that networks and national advisers first requested many years ago, expected, then demanded and got from providers, is no longer compatible with the RDR ethos.

The FCA notes that the review has “highlighted serious concerns” that the agreements with over half the firms sampled had the potential to“inappropriately” influence and the resulting “conflict of interests” were just not being managed effectively.

How did it get to this? Here are some waypoints (I may have missed a couple due to the passing of time) to assist with some historical navigation:

  • From the late eighties increased commission levels from larger distribution channels were being sought after the OFT got rid of the Maximum Commission Agreement (MCA) as it was seen to be anti-competitive. Well done OFT.
  • Smaller directly regulated firms demanded the same treatment as these big producers and got it, albeit mostly via service providers, commission uplifts were paid as long as you had a relationship with that firm, for example Portfolio Member Services (PMS} that became part of Bankhall
  • Broker consultant face-to-face relationship management started to go in the late 90’s and this trickle became a torrent in the first five years of the new millennium. Providers entering the new ‘Millennium’ low cost world could no longer support smaller directly regulated firms as they used to and would like to.
  • Provider firms greatly valued intermediated distribution as the solution (in MTV terms) to  “move those refrigerators”, but to do it at the same time as reducing costs and having margins squeezed meant that networks corralled, really well, a much needed distribution channel into a receptive space.
  • And in return for the ‘corralling’, those ‘fences’ and their maintenance was paid for by providers who in return had access to all these advisers in one place via the ‘rancher’, in this case the network.
  • Enhanced commission and special rates of allocation and charges were no longer considered good enough in the late 90’s and into the millennium, a tail chasing exercise ensued with networks wanting, demanding ever higher commission enhancements and they got them in return for that much needed distribution.
  • Then that was no longer good enough and we saw the arrival of the restrictive advice panel. Pay to play. This did not mean that network members could not use firms not in the newly created ‘VIP’ area, but it was much less likely those in the queue outside the roped barrier’ would see their products get a look in.
  • The money paid to ‘corralling ranchers’ for all the laudable business reasons explained became an addiction, fiscal heroin or cocaine by bank transfer, that enabled networks to thrive, indulge, play, expand, influence and above all control.

Like all drug addiction, the need for a way to further fuel the habit had to be found and that was by networks creating ‘preferred partners’, those who paid the ticket price, and those who paid to be in the VIP seats.

The addicts needed the fix but increasingly the suppliers were not seeing the return on investment, often because the addicts changed ‘supplier’ for better more powerful ‘fixes’, some died because their body corporate could no longer tolerate the toxic mess they found themselves in.

Established providers were becoming unhappy at the increasing mixture of demand and expectation linked to fickle reciprocal allegiance, but, commercial pressures saw them in effect ‘hog tied’ and on average, a traditional provider firm could be paying around £3m a year each to an array of networks.

New firms took the view that to get “down and dirty’ required lot’s of cash if they were to have some of the action.

And then came the “Dear CEO “ letter. This was not a pretty situation.

Remember that with some networks, demands of £500k pa were not unusual and that was on top of special commission rates and many other freebies such as the FCA highlight, like conferences at exotic locations.

As the song goes that aint workin’. And it was not fair on smaller directly regulated firms either.

In the eagerly awaited FCA consultation, they document examples of payments to secure distribution:

Example 1 – securing placement on a restricted advice panel

An advisory firm had secured substantial payments from a number of life insurers for providing support services, such as the promotion of their products and arranging training events; these life insurers (and no others) had also been selected for inclusion on the advisory firm’s restricted advice panels for investment products.

The process the advisory firm had used for panel selection gave it significant leeway to select life insurers who were purchasing services, and to discount those life insurers that offered suitable products but did not purchase the support services it offered.

Example 2 – significant increases in payments with little justification

A life insurer significantly increased its spending on support services offered by an advisory firm with little justification of the business benefit obtained and the steps taken to ensure a reasonable amount was being paid. Also, the terms of the service agreement provided for a sizeable increase in the services purchased in successive years. We considered the life insurer’s motivation was likely to be to secure sales of its products. 

Example 3 – a joint venture arrangement creating conflicts of interest

This involved a proposed agreement between a provider and advisory firm to jointly establish a new investment proposition. Under the proposed terms the provider would have paid a substantial upfront payment to the advisory firm. The advisory firm would have also received a greater proportion of the profits from the venture compared to its input into the arrangement, and its entitlement to profits would increase the more business that was channelled to the joint venture.

Given the inherent conflicts of interest involved, we also questioned whether the advisory firm could fulfil the requirements to be considered independent if it recommended funds it had a role in manufacturing.

As with similar joint venture-style agreements we reviewed, we prevented the arrangement going ahead in that form.

So networks were ingesting vast amounts of cash, charging the advisers who were part of them sizeable retentions and yet, if many ex and current network advisers are to be believed, value for them was not always fully understood or appreciated and the sums being received from providers was not made too clear.

Networks have many benefits for providers, they also greatly benefit small advisers; but they come with many downsides. especially if they go out of business as we have seen happen over the years. Network collapses are a fiscal version of the 9/11 twin towers collapses, businesses are lost, livelihoods and value destroyed, consumers affected and often there is no way out of the rubble for many.

The costs of the collapse clear up falls to the FSCS and then ultimately back to the reducing amount of surviving adviser firms. Any indemnity commission debt falls to the provider.

RDR has been a wake up call for advisers. It is a challenge to providers and a potential problem for the financial stability of networks that mostly seem to see losses, not profits.

Challenges for advisers are very well known and are endlessly discussed.

Challenges for providers are not so clear to advisers but I can assure you that RDR for them has been extremely costly in fiscal as well as human terms with massive job losses.

They also face the problem that as ‘manufacturers’ of product, albeit intangible, they still need to “shift those refrigerators”, get products to market. To do that they need a route to market and a delivery vehicle. Pre and post RDR that is mostly by way of intermediated distribution and it seems to be the case that it will continue that way for some time to come.

But unlike before RDR, the manufacturer cannot pay the distributor who cannot be on the receiving end of ‘sweeteners’ to make their products stand out above the rest. A conundrum as well as a challenge in the form of a level playing field.

Networks and smaller directly regulated firms can now ‘play nicely together’ with those smaller directly regulated firms knowing that their network counterparts have not got the benefit of better commercial terms, special rates and subsidy by way of tenuous or blatant links to support organisations set up to ‘launder’ their ‘protection money’ coming in the form of provider cash.

The FCA makes it clear in Principles for Businesses – Principle 8 (Conflicts of interest) that states “We expect all firms that we regulate to undertake their business in line with our eleven Principles for Businesses. Principle 8 requires that a firm must manage conflicts of interest fairly, both between itself and its customers and between one customer and another. SYSC 10 sets out specific rules in relation to the identification and management of conflicts of interest.

This was not so much about ‘buying’ distribution (after all that is what providers are in business for, to see their products fly off the shelf) it was to make sure they were not blocked from a valuable distribution source.

What we now have is a level playing field for providers too where distribution success is determined by traditional values of service, charges, performance, rate, and product features.

And not by who pays the most ‘protection money’ or bulk buys all the ‘best seats’.

Regarding us, when starting Panacea, a key driver was that smaller directly regulated firms did not get the support that networks benefitted from. That was not fair and we wanted to correct that in a way that was not distribution driven and created a level playing field. We are supported by providers in an RDR friendly way, by any provider in fact who wishes to support the ethos of seeing the ‘little guy’ helped along toward creating their own business success. So far we have 42 firms supporting a community of some 17,000 that has produced up to the end of Q2 some £4,046,912,909 of premium income.

Not bad for smaller directly regulated firms, and a shining example of how a community driven by agnostic support for adviser firms can help create better consumer outcomes.

Liar Liar pants on fire

When I started my own adviser practice back in 1988 I was very conscious about professional image. I was also very aware that criticising peers and competitors was not the way to go when trying to build my own ‘brand” or attract new clients, it was breaking the golden rule of not ‘knocking’ the opposition to gain credibility.

Indeed regulators over the years were very specific regarding advertising standards that firms adopt and that they should not employ ‘knocking copy” and I would expect that the FCA is no different.

At Panacea, we are very keen on following those social media engaged firms who go about promoting their businesses via tweets. These can and often do provide us with access to some highly creative promotional ideas to share and help others that many of the ‘twitter-sceptical’ would be well advised to study too.

In doing so last week I noticed a tweet from a firm that was, shall we say, a little strange.

The tweet said, “would you be surprised to find that your financial adviser has stopped trading?

Curiosity got the better of me as at first I thought this was a ‘tweet’ from a CMC looking to drum up trade, so I followed the link in the tweet to the site of the firm in question.‪ 

From there, and you can look for yourselves, there were many statements that did not paint a very pretty picture regarding the supposed ethics and practices of many financial advisers in business today. And for prospective clients and consumers it would sound alarm bells I am sure.

Now I know advisers can be very contrary and often scathing about the advice other firms give, especially when they may have no knowledge of what led to a particular advice situation (a little like the joke about a tourist in Ireland who asks one of the locals for directions to Dublin. The Irishman replies: ‘Well sir, if I were you, I wouldn’t start from here’) but what unfolded should cause some consternation to ALL financial advisers.

The firm in question makes a number quite sweeping if not highly controversial statements on their website that will be bound to raise a few hackles, these include:

  • the drop in financial adviser numbers should be a good thing
  • the remaining ones are of a better quality, and have higher standards
  • check if your financial adviser is still trading
  • we think that many financial advisers will struggle to adjust their businesses to the realities of running a professional fee-based practice.
  • with this in mind, they may see cash flow suffer and we could see a further reduction in numbers in due course.

Wow, strong stuff!

The firm in question also makes this “why we are different” observation: “We tell you the truth about your money whereas we believe that the majority of Financial Advisers don’t. It’s not that they lie; they simply don’t tell the whole truth because they have to look after their interests as well as yours”.

The FCA is, understandably concerned about the internet (mainly because it cannot regulate or control it other than by threat) and issues guidance on advertising in general and in particular what firms should avoid.

The FCA understandingly states that in a financial promotion “there is an element of persuasion. An inducement is intended to lead, ultimately, to an agreement to engage in investment activity”.

They go on to say in regard to communications that “They must be fair, clear and not misleading”and very specifically they state that a key element of any marketing activity is “Balance, as a key objective of marketing is to attract as many potential customers as possible, we often see marketing promoting a product in an unbalanced way, which is ultimately unfair for the consumer”.   

You can decide where statements like those above sit!

The industry has taken quite a beating of late with fines, naming and shaming, death by dikat and more. The adviser side of the industry does not need to bayonet the wounded on top. I think that firms who are using negative marketing copy such as we found, would be well advised to consider FCA guidance on the subject, but more importantly consider the negative image they may impart of the industry and their peers in their eagerness to positively portray their own business by way of ethical and commercial assumptions that may not accurately reflect reality.

Don’t put your daughter on the stage Mrs Worthington

For many older advisers out there the memory of starting their own adviser business may be a little hazy but I think now is the time to put a reality check in place for those ‘young gun’ entrepreneurs who may have been thinking this was a great idea for them to pursue today.


Because financial services regulation today has sounded the death knell for any directly regulated ‘little guy’ fulfilling his or her dream of starting their own, small financial advisory firm.

This is either the intended outcome of RDR and associated manoueverings or an unintended consequence. You, the reader, can decide.

Apart from asking the question “who in their right mind would want to start their own financial advice business” today from scratch, we should examine what is involved in starting one up.

And I mean from scratch, no poaching or walking off with someone else’s client bank from the firm you work at, but by starting with zero clients, a dream, a calling and a vision? Something that most if not all older advisers had to do and will remember only too well.

Let’s park the less than simple task of getting your first client and having them pay you. We need to look at what is involved to even be able to issue that first invoice.

And as Jessie J sang, “Its about the money”, lots of it. You have the idea, you have the plan, you have the qualifications and with that comes the first problem.

You need to be authorised to start and if you are sensible you will realise that outside help is worth paying for to achieve that if you want to avoid long waits. So on top of the £1,500 application fee, a further £3,000 or so should see you on the way.

On the authorisation journey, if you are an incorporated business (setting that up costs too, and, only the insane would take the route of sole trader) you will need to demonstrate that you have money to underpin the business. That is called capital adequacy, changing soon from £10,000 to £20,000.

Current minimum requirements are that firms must hold capital equal to the greater of four weeks EBR (Expenditure Based Requirement) or £15,000, by the end of 2013, the greater of eight weeks EBR or £15,000 by the end of 2014 and the greater of 13 weeks EBR or £20,000 by the end of 2015.

And, here’s the crunch, capital held for regulatory purposes is not working capital, many established small firms may find that their business activities must be restricted to work within the lower budgets available.

So a new firm, with no clients and no revenue has a problem that may stop the dream in its tracks at this stage.

On top of this, further costs will be incurred, assuming you still have the money.

You will need PI insurance.

Ballpark figures from AON based on a new start up (the areas of an advisers work plays a major part for Insurer’s to accurately rate the risk) and so these figures represent the minimum cost per Limit

Limit of Indemnity (Aggregate)  £1,600,000      Excess £2,500/£5,000 iro Pension & Investment    Premium £1,277

Limit of Indemnity (Aggregate)  £1,700,000      Excess £2,500/£5,000 iro Pension & Investment    Premium £1,393

Limit of Indemnity (Aggregate)  £1,800,000      Excess £2,500/£5,000 iro Pension & Investment    Premium £1,500

Limit of Indemnity (Aggregate)  £1,900,000      Excess £2,500/£5,000 iro Pension & Investment    Premium £1,626

You will need an office of some sort, serviced maybe, working from home was considered acceptable years ago, but for the newly qualified, new model adviser out there, working from home is not exactly the professional image you seek…….. is it?

You will also need:

  • Compliance consultant – Lee Werrall at CEI confirms that for a one-man band this could be around £150pm if all is straightforward
  • Marketing assistance
  • Accountant
  • Solicitor
  • Computer equipment
  • Software
  • Financial modeling and research tools
  • Car or transport of some kind
  • Back office and support (paraplanner/ pa)
  • Stationary
  • And a functional interactive website

You will need to have a significant wedge of cash should the FSCS want some money as soon as you start, by way of an additional pot topping-up levy for something that was nothing to do with you.

The FOS will take some of your money too by way of levy.

So it will not take too long to burn £20,000 or more, and still you have no clients.

And no income.

You will need to market what services you offer, differentiating you from those you think you are better than they are at doing the job And that costs too.

This famous song in the title, written by Noel Coward, could very easily be adapted today for the financial services ‘profession’, in particular the line that goes:

The profession is overcrowded. 
And the struggle’s pretty tough”.

It is overcrowded, there are only so many high net worth clients and existing firms should not be complacent enough to assume that their clients will be happy as milking cows paying high fund based fees for your services, especially given the noises coming from the FCA. And as trail may soon go too even long established firms could suffer, especially those who have been highly ‘acquisitive’.

Regulation and it’s cost has driven the mass market away from the thought that financial advice is worth paying for and given what surveys suggest consumers would be willing to pay, that is hardly likely to recover the set up costs for ‘Newco’ anytime soon.

If you look at the average hourly rate that advisers in the UK charge, according to our research with GfK and Touchstone, you will have to work a lot of hours at £165 p/h to just cover the start up costs, let alone your own day to day living costs, mortgage etc. And then wait to be paid, either from the client or by provider charging.

Work it out yourself.

The natural outcome from a double whammy of regulation linked to stiff competition will only see falling revenue streams, failing firms being the outcome and the ever increasing cost of regulation being spread across fewer firms as a result will put more out of business.

Regulators today are in many ways a ‘doppelganger’ of the trade unions of the 1970’s, creating unrealistic, restrictive working practices at high cost allowing little or no competition. And we all know how that ended.

Financial services as it stands today has the ability to be the industry that destroys itself by excessive, costly, ill thought out regulation imposed on the wrong people in the wrong way for the wrong reason.

The FCA has recently been trumpeting the fact that adviser numbers have gone up since RDR and the industry should as a result rejoice.

From January 2012 to July 2013 23,406 registered individuals have left the industry and 9573 have joined. Hardly something to shout about.

So, more on that subject soon, all may not be as rosy as the FCA may suggest and the minimal growth of 1231 RI’s will certainly not be made up of very many small, new DA firms starting up.