The Financial Conduct Authority has its eye on advisers who charge predominantly on a percentage-of-assets-invested basis. So, is the model open to bias, or is the regulator tinkering unnecessarily?
Now the financial services regulator is confident it has eradicated product or provider bias following the Retail Distribution Review (RDR), it appears to be turning its attention toward ‘dealing’ bias.
Last week, Financial Conduct Authority (FCA) chief Martin Wheatley suggested advisers who charge predominantly on a percentage-of-invested-assets basis would spike the regulator’s interest.
This is not because the FCA believes that particular charging model is inherently flawed – after all, it has always been the most efficient option for, and favoured option of, many clients – but that it could be mis-used by advisers who are over-reliant on it to provide an income.
Are percentage-of-assets charging models open to bias?
“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,” Wheatley, speaking at the final annual public meeting of the Financial Services Authority, said.
Though some advisers took to messageboards to attack the FCA’s stance, other stakeholders said they understood the regulator’s position.
“Wheatley’s concerns are obvious,” said founder and managing director of IFA Centre, Gill Cardy. “If you sell advice you should charge clients for it.”
Tower Hill Associate founder John Lang said advisers who only charge clients if and when they proceed with an investment purchase are flirting with the old commission model, while Facts & Figures managing director Simon Webster suggested the practice drove “a coach and horses through the spirit, intention and rules of RDR”.
But other advisers disagreed. They claimed that operating a model whereby customers only pay once they have signed up to do business – though a risk as the customer could simply walk away without paying a penny – was still RDR-compliant.
Barrett Financial Solutions senior partner Kim Barrett, who, like many advisers, does not charge customers for an initial consultation, said: “We say to the client the first meeting is at our expense. Then we map out the charges. If a client decides they don’t want to invest and walk out, that sadly is the law of the jungle.”
He added: “We always get a client agreement for any fee we charge. That means we have to talk to the client, tell them how much we are going to charge and, in most cases, get them to sign something for the relevant product provider so we can get it paid. How much more transparent does [Wheatley] want it?”
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