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How financial advisers can stay out of the focused advice trap

Since the Retail Distribution Review put paid to advisers living off product provider commission, many have resorted to taking adviser charges out of pensions in order to earn their remuneration. There is nothing inherently wrong with that and it probably improves their customers’ tax position in most cases. However, there is a trap that I have seen a few advisers walk into which puts their businesses at complaints and compliance risk. It also reduces their scope for earning fees.

Although the regulator does not like it, many firms charge a percentage of funds under management, reducing the rate for larger sums of money. This typically involves bringing within the firm’s ambit a range of investments and pensions on which the customer is seeking advice. In a recent case I looked at, the adviser did what the regulator wanted and charged a flat fee collectible monthly during the year through an adviser charge. However, he came worryingly close to making the same mistake as our percentage of funds under management friends.

The customer had a large pension which was the product of a transfer recommended by another firm, a workplace plan and another personal pension invested in a with-profit fund with a guaranteed bonus rate. The individual probably had other life assurance and financial needs. In reality, the file shows that the customer just wanted advice on the policy that had received the transfer. The adviser was content to take his quite modest fee on a recurring basis from the adviser charge. I think that this may have distracted him from a risk and an opportunity.

All advisers who limit their attentions to only some aspects or products held by the customer run the risk of not making it clear to their customers that they are not reviewing their other needs or products. In this complaint case, the customer tacked onto an unrelated complaint the allegation that the adviser had not advised him to make further pension contributions. The complaint should fail at least on this point because the letter accompanying the client agreement sets out the purpose of that contract, namely advice on investing the transfer proceeds and this point is repeated in the three subsequent annual review reports. None of these documents refer to the two other pensions even though they were clearly listed on the fact-find and one was researched by the adviser with the help of a letter of authority from the client. Ideally, the adviser would have gone a good deal further in the client agreement or letter accompanying it and stressed that no other advice was either being sought or received.

Even where clients come to see advisers looking for specific help with something, skilled advisers should explore whether they want more broad-based help. It is not difficult for a customer to interpret “advice on my pension plan’s investment” to include recommendations about making future contributions to it or another pension. Equally, investments going into one end of the client’s finances can impact on the risk levels of their overall holdings. (In the case in question, it could not have done so since the pension was easily the biggest family asset apart from the home.) Pension holdings affect life cover requirements and a whole range of other needs. If the customer drops dead, the surviving family members may not wish to plough through piles of review letters to understand why the family has been left with inadequate life cover.

More obviously, advisers who fail to at least offer more general advice are reducing the value that they can provide and thus the remuneration they can earn. The customer can always reject the suggestion. If clearly documented in both client agreements and every review letter, that will be the end of the matter.

All too often, though, advisers used to being paid from adviser charges or platform deductions from holdings shy away from things that do not have a value from which a percentage can be taken or a deduction can be easily managed. In doing so, they are sometimes putting their businesses and their clients at risk. They can and should agree a separate fee for a proper holistic review of the customers’ finances.

It is quite strange how advisers’ practices seem to have changed. In the pre-RDR, perhaps pre-2000 era, IFAs positioned themselves as general advisers to families. Commission bias often created poor outcomes in this respect. Now that the bias has been largely eliminated, adviser charges and platform deductions may have reduced the scope of some advisers’ activities and in the process increased the risk.

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