An IFA has predicted that in the coming year a growing number of advisers will adopt a model that splits fees for advice and product implementation to counter mounting concern from the regulator over contingent charges.
In an interview with FTAdviser, to be published later today (7 February), Craig Palfrey, certified financial planner and partner at Cardiff-based Penguin Wealth, said the regulator hinted at a Personal Finance Society conference last year that advisers need to charge higher fees for advice, regardless if the end result is a product.
Minutes of the Financial Conduct Authority board meeting held in June 2013 also revealed concern over contingent remuneration, that is charges that are only received in the event that a product is sold as a result of the advice given.
Board members highlighted that firms using contingent charging models had an increased risk of ‘churn’ given the need to sell products to generate income.
Mr Palfrey said: “They still think there are too many of us giving away everything and only getting paid when a product is acted on. I do think the massive change in the market in the next 12 to 18 months is we will see bigger advice fees and less implementation fees.”
Last year, the FCA said in its RDR implementation review that it did not approve of advisers disclosing charges solely in percentages without stating fees in cash terms or offering a cash equivalent. It also said some charging structures were confusing for clients.
Mr Palfrey added that he believes the FCA’s message had been misinterpretated and that the it does not have an issue with advisers getting paid a percentage when clients do buy a product, as “that is where your risk still is potentially”.
He argued that the regulator instead wants to see “specific advice charges for the effort taken” that are charged irrespective of whether the advice eventuates in a sale.
Mr Palfrey’s firm operates this model: clients pay a fixed advice charge irrespective of the outcome, and then a more modest percentage charge related to any product sale, which differs depending on the complexity of the product.
He said: “The product pushers and advisers in the middle will carry on as they are, but I think more of us will be charging fees for advice to engage with a client.
“Over time those fees will become bigger and implementation fees will become less so I imagine the typical adviser is still taking 3 [per cent] plus 0.5 per cent or 3 plus 1 per cent.
“I think what we will see is Mr and Mrs Jones paying £1,000 upfront, for example, and then 1 per cent for the implementation or something like that. That’s how I see it probably going and that’s where I would like us to be going in 2015.”
Mr Palfrey added that although his firm does work to that model, the charges “are probably not as high as they should be at the moment”, citing that the five advisers at Penguin Wealth “are all in slightly different places when it comes to experience and client banks”.
He said: “But we are certainly charging more and more for advice.”
Mr Palfrey said, however, that there is still a place in the market for effectively loss-leading advice to certain clients, which may later become more economically viable clients in their own right.
He said: “Those advisers that have been in business for 20 to 30 years who have got good client banks, if they are approached by existing clients’ friends and families I think there is still scope for us, as an industry, to help people for free initially.
“However this is on the assumption that if they are coming to an adviser for the first time and are over 40 years of age, the chances are there will be some transactional work to do but I think you’ve got to be absolutely crystal clear that if I do something for you, I am going to get paid.
“I don’t think anyone should be giving financial planning away for free which is obviously slightly different.”
The full Friday Interview with Mr Palfrey will be published later today.
