IFA Centre highlights issues of ‘obsessing with percentages’
Advisers should think twice about charging clients based on percentages because it is often not in the best interests of either party, Gill Cardy has warned.
Speaking at an all-day conference in London, sponsored by the IFA Centre, on independence after the retail distribution review, the managing director of IFA trade body, said she was concerned about the “obsession with percentages” as a post-RDR pricing model.
She questioned whether tapered percentages were fair to all sizes of clients and argued that percentages are difficult for clients to understand.
Ms Cardy said: “Having a tiered structure is not easy for the vast number of people who don’t know how to work out percentages and in the new regime you will have to put a number on all the percentages anyway.”
Deciding which assets to levy a charge on was another difficulty Ms Cardy raised with the audience.
She said: “Percentages of what? Assets advised on? Assets on the wrap? Everything you own? It starts getting complicated and it’s not necessarily that simple to apply.
“If you are worth what you are worth as IFAs, why do you link what you earn to the value of the assets on which you advise? It’s good news when the stock market goes up but what happens when it goes down? You are still offering advice of value.”
She said when clients use the money the adviser has helped them achieve to make large purchases, such as a holiday home or an annuity, the cashflow to the adviser will also inevitably fall.
Ms Cardy said this was “wrong on so many levels” and pointed out that percentages can even lead to conflicts of interest.
For instance, if a client gets a million-pound bonus, but also has a large mortgage to pay off, an adviser whose remuneration is based on a percent of assets might find it difficult to tell the client to pay off the mortgage debt, rather than invest the cash.
Tristan Freer, director for Gloucestershire-based Bank House Investment Management, said: “Our model is based on a fixed-rate fee or hourly model. With percentages, clients end up paying different amounts for the same service, and that’s not fair.
“People who think they can just charge a percentage because it looks like commission are living in cloud cuckoo land because the FSA will ask why they are charging one client twice as much as another for the same service. However, come January 2013, I don’t know how we will deal with clients who just want to put £200 a month into a pension scheme. It’s not affordable for them to pay fixed fees up front. Commission was the best way to service those people, so the industry will lose a big proportion of people who can no longer afford financial advice.”