How can you tell when something is an industry or a profession? Doctor-profession. Lawyer-profession. Chartered accountant-profession.
In 2013 we woke up to the dawn of the Retail Distribution Review (RDR), minimum qualifications and the outlawing of commission (almost).
Many IFAs have morphed into financial planners or wealth managers; this may help in repositioning the business, but does it move the dial in evolving from an industry to a profession?
I think a lot of the debate will revolve around how you get paid in life. The fund management industry has not tried to rebrand itself. Many managers may have shaved their costs, but the industry is compensated by an annual fund charge in the main.
There’s the rub
Professionals like lawyers, accountants, doctors and dentists charge either an hourly rate or a fixed fee for service. And here I think is the rub. These professionals, just like IFAs have an education process, a CPD process and a regulatory body. However, they don’t have an ad valorem fee linked to global stock markets.
I am taking no moral high ground here, just a view as to why it is difficult for the IFA industry to be seen as the IFA profession, when the business’s income is linked to an index, not individual performance. If the stock market goes up by 20%, or falls by 20% is the value of your client work 20% better or conversely 20% worse?
Being practical, change does not happen overnight. Pre RDR, many IFAs had an income model inherited from the Unit Trust industry, where an initial and ongoing charge was levied by the Unit Trust and subsequently split between the fund manager and the intermediary. Post the implementation of RDR by the Financial Conduct Authority (FCA), it was expedient for many firms to replicate their cost structure, but as an adviser charge, rather than completely reinvent their business model.
Eight years on, the FCA is keen to put slide rule over its work and review the outcome of RDR. This review has been deferred until next year and will come after a global pandemic has torn through many clients’ personal balance sheets.
It also comes after Australia’s Royal Commission review into misconduct in the banking, superannuation and financial services industry.
The Royal Commission’s report is a long read – some five hundred and thirty pages in total. I can’t admit to having read the whole report, but I can pull out some salient points.
Australia had its own version of RDR, called FoFA, the Future of Financial Advice, in 2012. These reforms had three principles as below:
- the imposition of a best interests obligation on financial advisers giving personal advice to retail clients;
- a ban on conflicted remuneration; and
- measures intended to promote greater transparency in the charging of fees for advice by requiring consumer agreement to ongoing fees, and enhanced disclosure of fees and the services associated with ongoing fees.
The similarity with our own RDR was to shift the onus of remuneration from product paid to consumer charged.
In the Royal Commission report it makes the following observation on the outcome of FoFA:
“Unlike many other service industries that operate on a fee-for-service model, much of the financial advice industry did not choose to structure its fee arrangements on the basis that a client would pay a fixed fee or an hourly fee for the time spent by an adviser in preparing advice for the client. Rather, in what appears to have been an attempt to replicate the revenue stream that flowed from a combination of upfront and trail commissions, many advisers charged an upfront fee for preparation of a statement of advice, and encouraged clients to enter into an ‘ongoing fee arrangement,’ under which the adviser would charge an ongoing fee in exchange for particular services.
Of course, unlike a trail commission, which is paid by the product issuer in recognition of the initial sale of the financial product, an ongoing fee is paid by the client, and is paid in exchange for the provision of a service.
This shift – from a model that imposed no ongoing obligations on a financial adviser to a model that did impose such obligations – lies at the heart of the ‘fees for no service’ matter.
The report defines a new term that might boomerang over here – “fee for no service.” Essentially, the report noted that the consumer had been asked to sign an ongoing fee deduction agreement, but the services received were not commensurate with the cost levied.
It’s a tricky one as the current “industry” standard in the UK for selling an IFA business model is based on recurring revenue, not whether financial planning is an industry or a profession.
Richard Bertin is founder and chief executive at Tether