For over a decade, since the Retail Distribution Review (RDR) was implemented, financial advisers have increasingly shifted their commercial models towards recurring fees. Today, two-thirds of the revenue in the UK financial investment advice industry comes from ongoing fees based on assets under management (AUM), amounting to a substantial £3.6 billion annually out of a total industry revenue of £5 billion from investment sales. This model has been seen as a lucrative strategy, boosting firm valuations to three to five times their recurring revenue, thus facilitating early exits for firm owners.
However, the tide seems to be turning. Many law firms are now clawing back unearned fees from these advice firms, bringing to light the shortcomings of a model heavily reliant on recurring charges. A significant 90% of advice firms charge a percentage of AUM for ongoing advice, often without delivering or documenting the services to justify these fees. As a result, these firms now face the repercussions of their past actions, with legal claims and liabilities threatening their financial stability.
Legal Liabilities for Directors
The legal landscape for company directors in financial advice firms is becoming increasingly treacherous. While limited liability status offers some protection, there are scenarios where directors can be held personally liable for the company’s debts. These include:
- Overdrawn Director’s Loan Accounts: Directors borrowing money from the company without the means to repay can be held personally liable.
- Signing Personal Guarantees: If directors have provided personal guarantees for company debts, they can be pursued personally if the company defaults.
- Fraudulent Activities: Accumulating debts through fraudulent means, such as taking on credit knowing it cannot be repaid, nullifies limited liability protection.
- Director Misconduct: Any form of misconduct, including mismanagement and negligence, can lead to personal liability.
- Insolvent Trading: Continuing to pay dividends while the company is insolvent is a clear breach of duty, leading to personal liability.
- Misfeasance: Using company funds for non-business activities or undervaluing company assets to dispose of them at no value is a serious offence.
The Rise of Claims Management Companies (CMCs)
The situation is further complicated by the aggressive tactics of law firms and CMCs, reminiscent of the Payment Protection Insurance (PPI) scandal. These entities are heavily marketing claims over missed annual advice reviews, with a particular focus on firms like St James’s Place (SJP). Despite the FCA and SJP advising clients to approach the company directly, the allure of potentially high compensation has driven thousands to law firms and CMCs.
Law firms, unlike CMCs, are not capped on the fees they can charge, often taking 30% to 48% of successful claims. This disparity has created a lucrative market for legal professionals, who are now investing heavily in marketing and call centers to attract claimants. Firms like AMK Legal, charging up to 40% plus VAT, represent a significant portion of this burgeoning market.
A Regulatory Perspective
The FCA has been vocal in urging clients to bypass CMCs and deal directly with advice firms for redress. However, the Solicitors Regulation Authority (SRA) has taken a lighter touch regarding fee regulation for law firms, potentially encouraging more legal entities to target advice firms. This approach has raised concerns about the quality and ethics of some claims, with the SRA warning against law firms generating costs without proper client consent.
The Future of Financial Advice Firms
The increasing scrutiny and legal claims against financial advice firms signify a critical juncture for the industry. Firms that have relied heavily on recurring fees without providing corresponding services are now facing the consequences. This scenario serves as a cautionary tale for current and future advisers about the importance of transparent and documented service delivery.
As the industry navigates this challenging landscape, the question remains: should advisers, past and present, fear liabilities chasing them to the grave? The answer lies in their ability to adapt to more sustainable and accountable business models, ensuring that the fees they charge are genuinely earned and documented. For those who fail to heed this warning, the chickens have indeed come home to roost.
The saying “the chickens have come home to roost” originates from the idea that actions or words can return to cause problems for the person who initiated them, much like how chickens return to their coop at night. This metaphor implies that negative actions or mistakes made in the past will eventually come back to have consequences.
The phrase has its roots in the 14th century, with similar sentiments appearing in various cultural and literary contexts. The earliest known use of a similar expression is from Geoffrey Chaucer’s “Parliament of Fowls” (1382), where it conveys the idea of consequences returning to their origin.
In modern usage, the saying typically means that one’s past wrongdoings or mistakes are now causing trouble or retribution. It serves as a reminder that actions have consequences and that one cannot escape the eventual fallout of their deeds.
Academy of Life Planning 