7th October 2013

Doom and Gloom

No, not the recent Rolling Stones album, but will the FCA next find fault with adviser servicing fees with ‘Miss- billing’ as their next scandal? 

Recent forums discussing financial adviser remuneration, employment status and fees have highlighted one more unseen, unintended and possibly unfortunate consequence of the RDR. 

Miss billing, or, as the FCA boss, Martin Wheatley has labeled it, miss-dealing.

One of the key aspects of the RDR was to remove the bias that could be created by commission. However, as Martin Wheatley has already pointed out, “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 is no disagreement that financial services advisory firms need to generate revenue to survive, thrive and grow. To do this they now need to ‘sell’ their service proposition, not a product. 

In previous times, adviser businesses were driven by sales.  Those doing the ‘selling’ were multi-taskers – people who could prospect, identify a need, devise and articulate a solution, execute that solution and as a result they would see reward and their business, if enough solutions had been ‘sold’, would see survival turn to growth.

‘Sales’ is now seen as a dirty word, but let us not forget that these people did create wealth – not just for themselves but importantly for their clients, their employers and those provider firms too who’s policyholders and investors they introduced. That wealth went to create jobs, pay good salaries and the outcome was almost always happy clients with savings if the latest FOS figures on adviser complaints are to be a yardstick of success 

In the post RDR world the prospector and the salesman are still needed and a vital addition to any successful business. But even more important is somebody to bill.

However, if commission bias has gone along with commission, will the FCA now see miss-billing as an issue, with fees charged yet seeing nothing tangible being done at all?

Miss selling has often been identified with the benefit of hindsight, but accusations of miss billing could be much more difficult to counter and possibly difficult to spot too. With advisers under increasing pressure to survive post-RDR, and regulators seemingly concerned at the cost of and access to advice, could this be the next ‘big thing’ that the FCA focuses on? 

We hope not, but there is already much division about the possible consumer detriment of charging fees based on funds under management versus time with time often looking more ‘professional’ and representing better and purer value for the client.

But the possibility of the regulator looking closely at adviser charging models to see if they create work simply to raise a bill is a spectre that may loom large over some firms looking to survive the harsh reality of the post RDR world and the prospect of trail removal. After all with average fees being around £150 per hour, a couple of hours of creative billing per client over a year for a firm with a segmented client base of around 250 could soon generate £75,000.

As one industry expert observed, “the days of small advisers earning £250-300k a year have gone with RDR and there is a sense that the regulator does not like to see anyone earning a lot of money where financial advice is concerned”.

Of course the problem with that mindset is that if firms do not make decent returns, there will be no incentive to remain in business or to start a business. It may not be viable to remain in business and with reducing numbers of advisers consumer interests are no longer best served and there are fewer advisers left to pay the ever-increasing regulatory fees and levies.

By the way, here’s a history lesson for those with shorter ‘time served’.  There was a maximum commission agreement (MCA) in financial services before polarisation was introduced in 1988 as part of the Financial Services Act 1986. This totally eliminated commission bias and meant that mass-market advice was available for all, even those that preferred not to pay fees.

However, the MCA was later considered to be a constraint, anti-competitive in fact by the Office of Fair Trading and was banned as it fell foul of competition law.

You couldn’t make it up!

FSA/FCA, RDR