PA's Armchair Critic Brendan Llewellyn on the changing world of industry inducements...
On the one hand, providers are naturally keen to make sure they are not in breach of the Financial Conduct Authority (FCA) inducements guidelines, while advisers polarise between those who say they are unaffected and others who think restrictions fly in the face of normal commercial practice in any sector.
The FCA is also polarised between saying there is nothing new in this guidance, and then saying there is. What it has said – which is quite useful and fair – is that all parties must take responsibility for such things. Providers should not seek to push the boat out as far as they might, and advisers should not take whatever's going.
There is the possibility of more guidance, but for a subject such as this, clarifying guidelines will be like writing a corporate dress code – impossible without attracting ridicule. Aviva appear to have decided that drawing the line on scale of hospitality is too difficult, so they have drawn the line at zero.
Best to consider basic principles. The idea is that advisers are remunerated by their clients so all parties need to keep that thought uppermost. Entertainment is a normal part of any business relationship. Everyone knows when they are on the receiving end of excessive entertainment. Similarly for conferences and events of any sort.
The important point is that just because an adviser supports a provider with business, no reciprocal rights arise. I suppose this is counter-intuitive; isn't business an exercise in judicious reciprocation? Well, it has been but this is all about professionalisation – so things have changed.
These guidelines are aimed at the advised sector where distribution and manufacture are separate.
This separation creates the perennial conundrum that the people with all the client contact and understanding are not in the same company as those who make the decisions on product, price and service.
So, to prevent client detriment and commercial disadvantage against the vertically integrated, direct sales players, it is essential that advisers and providers, distribution and manufacture work hand in glove.
To do this they need to meet, to work on projects and developments and hence the research/consultancy requirement which has caught the interest of the regulator.
Adviser groups have recognised that their client and market knowledge has value – value to the provider groups. That value has been monetised and so a situation has arisen where providers pay advisers for such knowledge.
The regulator has said such goings on must only be at cost. This may well be reasonable, but the question is, what is cost? If I, as an adviser, spend a day helping a provider create a new product, then my legitimate fee is the cost of my time at normal rate.
Reasonableness would also include a sense of scale – if an adviser is doing a research day a week, for example, then he has probably morphed into a different job.
Co-operation is key
But the most important point here is that such co-operation is critical to the health of the sector. So if cost is defined as equivalent time cost for a given adviser, and such activities are not seen as an income supplement, then what's the problem?
Larger adviser groups, including networks, and some platforms, have some extra issues. Their size creates potential value in access to their individual advisers. This ought not to be too complicated.
An adviser group should have the right to create, say, a conference, a right to ask providers to exhibit at it, and the right to charge for attendance. The FCA is clear, though, that the adviser has no right to make a profit on this, or at least not to charge a rate in excess of commercial rates.
You might argue that the adviser group's commercial interest lies in its advisers gaining from the presentations or information from the "exhibiting" providers. In which case, shouldn't all the costs fall on the adviser group?
But without such events, the providers would have immense problems in communicating with advisers effectively and would need to consider a reverse of the long-term reduction in BDCs, for example.
So, commercial benefit for both sides suggests a cost share is fair. What isn't reasonable in this post-Retail Distribution Review world is for a large adviser group to operate with financial dependency on providers; and to reflect this, the FCA would not expect all costs to be carried by providers. Is* this is a real problem for adviser groups, then a review of their business model would seem a requirement.
The FCA has also said that support, in general, from providers should not be related to an adviser's choice of provider. Of course, you would expect some correlation between the incidence of "support" and the occurrence of business. I would always be suspicious of any support or inducements from someone with whom I have no business relationship.
The obvious point is that provider activity should not determine an adviser's pattern of provider choice nor reinforce a current pattern when appropriate considerations would suggest a change of provider.
Some have raised their eyebrows at Aviva's apparent zero-tolerance stance. Personally, I think the robust principle we apply to the buying of rounds, going in turns, is about right for most circumstances, whatever the commercial interests at play.
Several years pre-Financial Services Authority, I was learning the craft of a life inspector, in a pub north of Manchester. One inspector bought the beer, another the pies, another fed the fruit machine. The broker made all the strategic – nudge, gamble, collect – decisions and then pocketed the winnings. Low-grade laundering, you don't have to be lavish to be inappropriate.
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