The debate over percentage-based adviser charging is back in the news. I’m not sure why but this very well written article in the FTAdviser seems to suggest that the FCA doesn’t like percentage-based charging.
It seems to me that many people are missing the point of this entire debate. Let’s be clear, the FCA ISN’T against percentage based charging. I mean, how can it be? In the end, whatever the fees, it can be expressed as a percentage of the clients’ asset. Clearly they expect fees to be set out in £ and pp.
The real issue here is ‘Contingency Charging.’ This newish vocabulary was subtly introduced into the RDR II Dictionary (you do have a copy, don’t you?) by the regulator in Paper TR 13/5.
The idea of contingent charging or more precisely, ‘contingent fees’ has it’s root in the legal profession and it is the American speak which means you are working on a ‘No Win, No Fee’ (yeah… now it all makes sense when you speak proper English, doesn’t. If only the folks at the FCA could run it pass me before they add another word to that dictionary!)
So, for instance, if you agree with the client to go off and do all the research, and present them your recommendations, on the basis that they will only have to pay you if they followed your advice, we clearly have a problem. Apparently, there are still advisers out there doing this. This essentially introduces a dealing bias – because you don’t get paid unless clients buy a product, then its in your interest to recommend and persuade them to do so.
One upside of being a paraplanner for many adviser firms is that we get to see various practices and fee-charging is no exception. Truth be told, we hardly see any work don one a purely ‘no win, no fee’ basis. (Probably because we are quite picky when it comes to who we work with 🙂 What is more likely is that the adviser will agree a fixed fee of say £750 for the research and recommendations, and get the client to sign the agreement to that effect before they lift a finger. So even if client doesn’t go ahead with the recommendations, they will still have to fork out £750 ( let’s ignore the practicalities of actually collecting the fees, should the client decide not to proceed after you have done all the work)
Now, if the client accepts the recommendations, then they expect an implementation fee, typically expressed in percentages (and the nominal advice fee is waved). Herein lies the problem. It is not unusually for the implementation fee to be 3 times, may be event 5 times the advice fees. (So say client has pension pots worth £300K and the adviser is charging 1.5% to implement, that’s £4500 for advice and implementation, as against say £750 for advice only)
I’m not sure what the regulator’s reaction to this would be but it seems to me that there’s a degree of ‘contingency charging’ going on there. Does it take five times the expertise/time to implement as it does to research and recommend the product? Doesn’t carry five times the risk?
Ignore the regulator for a second (dare I say), but aren’t we giving away the more valuable apart of the advice here? Off course, majority of clients prefer the adviser to implement the recommendation but as clients become more savvy on post-RDR fees/cost of advice (and with the consumer media hell bent on ‘transparency’ for its own sake, they will), won’t they ask touch questions or look elsewhere, if implementing the recommendation costs them three times more?
Personally, I think this is a far more important issue than percentage based charging in itself. From a business point of view, percentage based charging for ongoing advice makes sense and if you look across the pond over in the US, that’s what many leading players are doing. This is where the tide is heading. Ultimately, it is in advisers’ interest to write the business and as long as it doesn’t detriment the client and fees are clearly set out, there nothing wrong with that.
The real problem is that if you are charging 3X more to implement than you are to recommend, then you run the risk of execution bias and I suspect that’s what the regulator doesn’t like. Even then, unlike the legal profession where percentage based ‘continent fees’ are deemed to be ‘professional misconduct,’ there are no FCA rules against it, only that it’s considered ‘high risk’ and firms should have oversight to avoid execution bias. (Paper TR 13/5)