Ms Jessie J may be a singer and not a regulator but she was correct singing, “It ain’t about the ch-ch-ching ch-ching, it ain’t about the bl-bling-bl-bling, it’s about the money money money.
A recent article in Money Marketing by Robert Reid stirred up a bit of a hornets nest making me reflect upon some of the wisdom imparted in July 2013, by the recently resigned FCA boss, Martin Wheatley.
He was quoted as saying:
“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 was considerable anti-Wheatley adviser anger expressed within the Internet ‘ether’ but for once, speaking as a very staunch defender of advisers, I think they may have not focused on the real metrics behind his words and given the reaction to Robert Reids tome, I still think Martin Wheatley actually had a point and advisers should really take notice of them before it is too late as adviser charging of fees as percentages through the product could well manifest itself in a soon to be named miss-adviser charging crisis if Canary Wharf has it’s way.
Advisers should not be afraid of making profit or seeing great inflows of income, after all they have to fund the regulatory cash outflow somehow.
But adviser charging by percentages of funds under management rather than time taken was always going to be sailing a little close to the regulatory wind in a fee only world. And yes, this thought may not go down too well out there, but it is a fact.
Adviser intentions from Panacea winter 2012/13 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?
Results from that very detailed GfK research conducted with over 400 advisers has indicated that post RDR, most advisers are charging fees to the fund.
A leaning toward an initial fee of 3% of funds invested and 1% for ongoing advice per annum across a wide array of segmented servicing models seems to be their stated norm although provider feedback would suggest a lower figure is more the reality, 1-1.5% as an initial fee and .25% to .5% ongoing.
Should we be surprised that the upper percentage of initial adviser fee quoted for a lump sum investment today is very similar to single premium pre RDR basic LAUTRO commission payment, around 3% I seem to recall?
If Frank Carson was an IFA he may say, “it’s the way I tell ‘em”.
But, let’s look at how the FCA may choose to look at this issue, advisers should take note, with the benefit of foresight on this occasion.
Based upon that GfK research, a proposed investment of £250,000 would see the advice fee set at £7,500. But what would the picture be if the FCA asked that the fee be justified based upon 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 (GfK survey confirmed hourly rate) charged by advisers was £167, the ‘math’ would imply that by comparison the advice on a time basis for a £250k invested amount equated to 44.9 hours.
I am not an adviser any more, but with so much technology resource available today, taking over a working week seems a lot of time to justify for one client? The FCA view may be similar?
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 less than for an investment of £250k.
The FCA will take a view that the RDR was not about professionalism by way of qualifications providing the ability to see adviser payment by a rebrand of commission. It is about reflecting professionalism by 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 calculation formula 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 after advice given equals no fee- as Wheatley implies, yet the time taken is almost the same, a service has been rendered and payment is due? Or is this a disguised advice cross subsidy?
So, how would advisers explain to the FCA that the following* is ‘TCF’ in a fee based, advice driven, post RDR world when charging advice to the fund?
Scenario 1: Advice charged to fund at 3% plus an ongoing 1% per annum, £7,500 (provider charges are on top):
Male 40 attained pays £200,000 as an SP pension contribution, it is grossed up to £250,000.The fund at age 65 and assuming a return of 4.9% would be £1.40m.
Scenario 2: Advice paid direct by the client on an ‘average’ hourly rate £7,500 provider charges are on top:
Male 40 attained pays £200,000 as an SP pension contribution, it is grossed up to £250,000.The fund at age 65 and assuming a return of 4.9% would be £1.85m
*Research data provided by a leading life office 26th July 2013, assumptions are an extreme!
So over a 25-year term, the eventual real cost to the client of initial and ongoing advice for this single premium contribution when charged to the fund would be a staggering £450,000 less of course the impact of adviser charge hourly billings.
If the client was charged on time, the hourly rate would be??????? Well you work it out on your own hourly rate!
It would be interesting to see a comparison of time based charging v percentage when levied to the contract over the term of the contract.
But I believe that what Martin Wheatley was actually saying is that the FCA ‘thinkings’, unlike the FSA, would indicate that basing charging on percentages of FUM, both initial and recurring, is not right.
Where I did take issue with Mr. Wheatley is that in 2013, 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 to the contract) he was sending strong signals that the FCA did not see it ‘appropriate’ that this previously agreed level and type of charging should continue. The suggestion being that advisers should prepare to hear that stable door slam soon despite very many adviser post RDR businesses being based on this charging methodology.
The more cynical conspiracy theorists among us may have very strong suspicions that the FCA was wanting to find yet another way to get rid of advisers 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.
In fact the only way advisers can remain in business with such a proposed ‘chocking off’ of income flow is that there is a similar ratio reduction in regulatory fees, by that I mean those of the FCA, FOS and FSCS.
After all, consumers could see much lower advice costs if firms did not have to ensure they are treading dangerous and deep fiscal water just to see survival in the face of the huge costs that regulation forces upon them.
And where is the consumer in all this? Research continues to show that there is a significant reality gap between what advisers think consumers will pay for advice and what consumers would actually pay.
Not a good ‘outcome’ as they say, if advice for all, but at a cost, was the intention.