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We live in interesting times as financial advisory firms come to terms with the lockdown and the gradual release from that. It will be interesting to see whether the efficiencies generated by working from home, webinars and client meetings on Zoom, Skype or Teams and documents completed and signed on docusign (other digital confirmation systems are available) become the new normal or whether advisers will return to face-to-face client meetings as soon as they can.

There will be very few advisers who have managed to continue to do business at the same levels that they been accustomed to achieving. In this difficult time, many advisers may have been kept afloat by their ongoing adviser fees and pipeline business completing. Of course, ongoing fees are only paid to investment and pension advisers possibly with some commissions coming from older protection plans. This is not available to mortgage advisers who are entirely dependent on fees and procuration fees on current and repeat business.

In an acknowledgement of this current situation, last week, the FCA sent out a questionnaire to many firms asking about their financial viability, cash flow and capital adequacy at this time. It seems that the point of this questionnaire was to take a snapshot of the current financial state of many firms with a view to trying to ensure that if they were in financial difficulty, that they would stop trading in “an orderly manner”. What a shame that it did not seem to be asking what assistance firms may require to enable them to continue trading.

The FCA gives high importance to promised reviews actually being provided and at the time that has been promised

Recently the FCA has investigated contingent charging on DB Transfers and has come to the conclusion that it should be stopped. This has been decided in the belief that if advisers only get paid if a client completes a transaction, in this case, the transfer out of a DB scheme, this could lead to poor outcome for clients because advisers may be tempted to recommend transfers that do not represent a good outcome for clients.

This is just the latest attempt by the FCA to move advisers away from being paid commission for writing business. One of the major thrusts of the Retail Distribution Review which was put into place on 31st December 2012. At the time, this plan was circumvented by providers re-badging commission as adviser fees. In my opinion, a baby playing peek-a-boo would have picked that up and stopped it at the time.

This move away from commission was to drag advisers kicking and screaming into the world of fee charging professionalism that is occupied by solicitors and accountants. The advisers would be considered to be professional having achieved a minimum of diploma level qualification, undertake regular training to retain their knowledge levels and charging fees for work undertaken. Thus, advice became a service in itself for which the clients would pay a fee.

However, there was a lot of resistance from adviser firms that had built up considerable value in their business by the collection of trail commission and ongoing commission on investment funds under management and it was thought that it would cause many firms to go out of business if this practice did not continue.

This matter has not gone away. Under MiFID2, which came into effect on 3rd January 2018, advisers were expected to undertake reviews of clients on an annual basis – to ensure that the product that had been recommended was still the most suitable for the client. The main point of this was to try to ensure that customers were being offered and more importantly receiving reviews of their products from their advisers. Part of this review involved the advisers confirming the costs of the review service each year, so that clients are aware of how much they were actually paying their advisers and being able to consider whether they were getting value for the fees they were paying.

The traditional method of adviser payment has been from the policy rather than direct from the client. So, effectively, the clients could be unaware of how much was being taken from their fund and the adverse effect that this may have on their investment. Also, many reviews were offered, but not undertaken. An adviser charge of 0.75% per year does not sound much. However, if the fund is £100,000, the cost is £750. If the fund is £1,000,000, the fee is £7,500. If the costs of undertaking a review to the adviser is £750, the adviser is breaking even on the smaller fund, but the larger fund is highly profitable. It could be argued that the larger fund may involve more working time, but probably not 10 times longer. It may be that clients with larger fund are subsidising other clients. Is this fair?

So, we come onto what a “review” involves.

Any reviews undertaken should be recorded, on a fact find or similar document. This will involve a review of:

  • their personal circumstances and any changes since the previous meeting
  • An update of investments, pensions and protection plans.
  • Review attitude to investment and other risks
  • Review client needs and objectives
  • Possibly make recommendations for each of these going forward.

The FCA gives high importance to promised reviews actually being provided and at the time that has been promised. This ongoing advice is very important to ensure that any advice given is still suitable or that other objectives are addressed in a timely manner.

The FCA has been keen for advisers to classify their clients into various segments of service levels. Most clients would be classified as retail clients, although corporate clients, sophisticated clients and professional clients should also be identified. The retail clients should be classified for the regularity of reviews or alternatively, at the other end of the scale, transactional clients, who will not receive any further service unless they request it.

This segmentation should be undertaken on the basis of client needs – mortgage and insurance clients, investment clients, pre and post retirement clients. Note that this is aa consideration and classification based on needs rather than the magnitude of investment funds. Although, it may well be that the client with a larger fund will have 2 or 3 reviews per year rather than just one. Alternatively, somebody just getting to retirement will require more time and care than somebody with 10 years to go before retirement.

This client review service is where I believe the FCA would like to see advisers spending their time and efforts rather than chasing around trying to find new clients and sell products to them. This is where real advice and knowledge to provide advice as a valuable service in itself rather than as a conduit to generating sales.

There are firms with large untended client banks. If an advisers works 240 days each year, how can they have a client bank of any more than 120 people? This would be an annual review every other day before the adviser considers doing anything else, extra reviews, writing new business or even CPD.

This may well bring us back to the lockdown causing us to start to use online meetings and digital distribution of documents to efficiently provide a good quality advice service to their clients.

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About Author

TC Compliance Services Tony Catt is a freelance compliance consultant working with several firms of different sizes. "I have previously been an adviser, which gives me a good understanding of the advice process and dealing with customers and I enjoy a close relationship with my adviser clients"

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