RegulationFeb 7 2014

IFA: Gov’t should subsidise financial advice

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We’ve all seen the seemingly endless discussion around the Retail Distribution Review advice gap and how it should be addressed, much of which involves stripping back some of the rules changes that came into force last year.

For Craig Palfrey, certified financial planner and partner at Cardiff-based Penguin Wealth, the answer lies in public funding.

Specifically, he says he would like to see government subsidies offered for provision of advice to smaller-pot clients to allow fees to be affordable and the ultimate remuneration economically viable.

“Arguably everyone needs some kind of financial planning. For example, if the household income was less than £50,000 per year, the government would pay £300 towards financial planning, or something like that.”

You might argue Mr Palfrey would be inclined to think in this way: his own firm has received an £85,000 grant from a fund set up by the devolved Welsh Assembly Government to set up an innovative online venture targeting prospective lower-income clients.

As previously revealed by FTAdviser, the money is being used to support the launch of a website called Increase Your Pension, which will provide clients with lower levels of investible assets free guidance on pensions options and a free analysis report on how products are performing.

Increase Your Pension is the first of four websites that Penguin plans to roll out under the trading name of its other business, Get Financial Advice.

Not free money

The money was paid from the Welsh Economic Growth Fund, which provides funding of up to £100,000 are provided under the scheme to promote business and social enterprise in Wales and thus support economic growth in the region.

“Apparently Wales qualifies for quite a lot of funding from Europe because of various parts of Wales being underprivileged so then the last government was keen to promote seven sectors in Wales to help boost productivity and creating jobs.

“I was introduced the head of the Welsh Economic Growth fund and I had him come and speak at one of my IFP regional meetings that I run and he talked about all these different things that were available.

“I spoke to him, it turned out there was funding available for training which we’ve benefited from, so two of my guys are going through the CFP [certified financial planning] and that is all being funded by the Welsh Assembly government... and a couple of our training advisers are getting their exams paid for.”

The Welsh Assembly government wants to make Wales a hub for financial planning, for financial advice

Mr Palfrey is keen to stress, however, that the funding is not “free money”, saying that if certain targets are not met relating to the creation of jobs the money is taken back.

He adds that without the funding he would still have launched Get Financial Advice, but it could have taken up to three to four years longer. The funding has enabled them to get there quicker and he says fits in with the Welsh government’s aim of making Wales “a hub for financial planning”.

“If we don’t hit certain targets then we don’t get the money or have to pay it back so we have to, over the two year period, create 10 to 12 jobs and if we don’t then when they come and audit us every year they can ask for some or all of the money back if needs be.

“The Welsh Assembly government wants to make Wales a hub for financial planning, for financial advice. They want us to create jobs... to get students into work.”

High expectations

Penguin Wealth was borne out of SJP - not the SJP you and I are familiar with, but directly authorised IFA firm St James Partnership. Mr Palfrey says he chose to launch Penguin along with former colleagues as he was not ready to go it alone.

Penguin Wealth became regulated by the Financial Conduct Authority in November 2012, just in time for the Retail Distribution Review.

There are currently five advisers in the firm including Mr Palfrey, who says he is not keen on recruiting more who are already in the market place because many have unrealistically high expectations of what they could earn.

“I’ve had chats with people over the last two to three years who potentially want to come here, since we’ve started doing the things that we’re doing.

“They don’t want to be employed, which is fine - I get that as I have never been directly employed in this industry myself - but they are looking for huge percentages of their income that they will bring in without understanding how we work.”

He added that Penguin Wealth has a “fantastic” admin and paraplanning team who do a lot of work for the advisers and due to that, potential advisers “just don’t get how we will have to price that plus the risk”.

“We just don’t fit a lot of people because they are all chasing the almighty dollar, which again I understand.

“I had a couple of guys come and sit with me over the last 18 to 24 months who were really interested in being part of the Penguin brand and when we suggest [a figure that] will be a best case scenario they are like, ‘oh’.”

Money back guarantee

Perhaps another thing that might make some advisers nervous is a peculiar offer Penguin makes to clients: it is one of few firms, perhaps in fact the only one that I have spoken to, that offers a money back guarantee.

“If the wealth management plan, when we go through it, doesn’t add value, then clients don’t pay for it. So far, we haven’t had one not paid for. Hopefully we are adding value or else we wouldn’t engage with them in the first place.”

It’s a bold offer to make, especially given Mr Palfrey’s view that fees charged directly for advice are often less than they should be.

He predicts 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.

This will mean clients paying the lion’s share of advice costs upfront, and then paying additional fees as a percentage of whatever product they take out, if a product sale ultimately eventuates.

“We’ve got a shift from this large transactional fees and implementation fees to bigger advice fees and I think this will be the big shift that everyone needs to get their head around in the next couple of years.

“I still think there are way too many traditional advisers giving away the stuff and I don’t think you can be doing that anymore.”

Independence ‘badge of honour’

If all this sounds rather ‘new world’ for some, Mr Palfrey remains a traditionalist in relation to advice models and asserts his belief that, over time, independence will once again become a “market differentiator” as more people move to restricted.

“I think the trade press and national press will eventually start talking about independence as a badge of honour again at some point. So I think independence could, along with certified and chartered and the BS8577, become that ‘stand out thing’ again... in the next 12 months or so.”

Last year, the regulator published its first RDR implementation paper which revealed that some advisers are not being upfront and honest about their proposition.

“I suspect that if you are independent it almost gets taken as a given especially if you are advertising yourself as you are.

“But I think the big debates in the industry and the big arguments you see on the websites is that people are still concerned that some advisers are masking and hiding the independent versus restricted argument.

“I hear stories [about a particular firm] that say ‘we are independent when it comes to fund management but we are restricted when it comes to products as they are our own products’.

“You hear those sorts of stories and can the FCA ever really clamp that out? Probably not.”