Contemporary financial planning is about a lot more than recommending financial products

The Financial Planning Professional: Part 1 of 6

The financial intermediary sector emerged mainly out of commission-based life insurance sales from the last century. Judging from continual unfavourable conclusions from industry consultations at home and abroad, even now advisers are still in the “incomplete transformation” from salespeople to professionals. Advisers are still more the selling agents of one or more investment firms rather than professionals.

An ‘Independent Financial Adviser’ (IFA) is a financial intermediary, a selling agent for a sufficient range of relevant products available on the market and is rarely a fee-for-service agent of the client. The norm throughout much of the financial advice industry is the so-called “asset-based fees” (a percentage of your investments).

Asset-based fees are simply commissions by another name, and the regulators say they influence the advice that clients receive.

Asking an investment adviser who charges asset-based fees: “What if the best advice you can give a client is to pay off their house?” The IFA would not know how to get paid. In other words, the IFA must sell you a financial product and get hold of your money so he can take a cut of it.

An IFA who charges asset-based fees is no more “independent” of this sufficient range of investment providers, than any other investment adviser affiliated to a restricted range of investment firms. Independence is only assured when you have no affiliations with product providers, and you are not paid by the amount of product sold.

A fee-for-service adviser is a buying agent of the client and an asset-based adviser is a selling agent of one or more investment firms.

Salesperson or adviser? And whose best interest is he working for?

Investment advisers reading this will rightly claim that they are bound by the “best interest” duty in the Conduct of Business Sourcebook. But how low is that bar?

And, according to the UK regulator, the Financial Conduct Authority (FCA), most firms operate under asset-based fees, which the regulator recently described as a remuneration arrangement that creates conflicts between the adviser’s interests and those of a client (PS20/6 s1.12).

Initial and ongoing asset-based fees create a conflict of interest, as an investment adviser may have a strong monetary incentive to recommend one course of action over another (PS20/6 s3.1). In other words, the regulator admits that there is a strong incentive to place earnings ahead of clients for most advisers in the UK.

The strategy where earnings are placed ahead of clients is known as ‘Asset Hoovering’. The way it works is this, asset-based advisers create an in-house investment proposition of model investment portfolios run on a platform and take ongoing fees for investment advice and portfolio management services. The fees are typically between 0.5% and 0.75%, and in two-in-five cases at 1%, per annum or more. In so doing, the investment adviser becomes affiliated with their own in-house investment firm, much in the same way as the restricted vertically integrated firm they so readily disparage.

The investment adviser affiliated to the investment firm then advises clients to cancel existing investments. The clients are sold similar replacement investments of the affiliated investment firm or portfolio of firms. The investment adviser receives “asset-based” fees. The asset hoovering technique generates extra unnecessary fees for the investment advisers and their affiliated investment firms, when compared to low-cost default arrangements available to their clients.

The price difference between the investment adviser’s in-house portfolio service and the default low-price retail multi-asset funds on a D2C platform, or Workplace Pension Scheme (WPS), is the investment adviser’s “asset-based” fee.

Adviser charges should reflect the services provided. Ongoing charges should only be levied where a consumer is paying for an ongoing service. Details of the service need to be confirmed in writing ahead of sale, as do the costs, and how the client may cancel. Firms must maintain robust systems and controls to make sure clients receive the ongoing service investment firms commit to. The level of adviser charges must at least be representative of the costs of the services delivered and the firm must not conceal the amount or purpose of the adviser charge (COBS 6.1 A.9).

The proposition of the asset-based investment adviser used to attract client asset is this, the focus is on short-term market-beating returns, as opposed to long-term planning. Even if those promises could be met, and in many instances they are not, the reputation of the investment adviser depends upon something outside of their control. Then the customer proposition becomes about price, which as customers compare returns, forces prices down.

As the regulator looks at the service for fee, consults on decency and uncovers examples of fees for no service, these asset-hoovers seek timely exit from the market, persuading naive advisers and behemoths to leverage to buy back books at high valuations; like some huge game of Russian roulette with valuation bubbles about to burst.

The investment advisers arguably knew — or should have known — at that time, about “the detriment this conduct caused to the clients”. Regardless, the investment firms and their advisers press on and fail to take reasonable steps to address the wrongdoing, as years of detriment pass by.

According to the regulator, over time, these charges can have a significant negative financial impact for consumers (PS20/6 s3.1).

To be continued.

Contact us today to find out how the Academy of Life Planning can help you transition from Investment Firm (Regulated) to Non-Intermediating Financial Planning firm (non-regulated).

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