The Financial Conduct Authority has challenged advisers to think about whether charging clients a percentage of their assets is the right model for people in drawdown.
Speaking at the Personal Finance Society’s annual conference in Birmingham, FCA director of life insurance and financial advice supervision Debbie Gupta said: “Most advisers we see are charging a percentage of the client’s assets. Is this the right structure for people withdrawing their assets?
“Each withdrawal reduces the level of fee it receives, and in time, that fee income can drop significantly.
“At the same time, a client’s circumstances may be getting more complex. As they age, they become more vulnerable, they may need more care from you.
“We will be really concerned if long standing clients were priced out of advice, just at the point when they need you the most.”
We don’t expect advisers to be charities
Gupta said more work is needed by advisers on managing conflicts of interest for charging structures.
She said: “Having identified conflicts of interest, what can you do to manage them? One area you may look at first is how you charge your services, and I know that this is a topic getting media interest.
“I know this is an emotive subject. We don’t expect advisers to be charities, everyone should be paid a fair amount for the services that they provide.
“But we do expect you to consider the conflicts that will arise, including how you structure your charges to ensure that this does not lead to consumers suffering.”
Contingent charging
At the conference, Keith Richards, chief executive of the PFS, spoke to IA about conflicts of interest around contingent charging.
In July 2019, the FCA said it will outlaw contingent charging for clients looking to transfer their DB pension, as well as putting forward the idea of abridged advice, a short form of IFA advice based on a high-level assessment of a client’s circumstances.
“We have acknowledged within our own response that, of course, we recognise that contingent charging for DB, in particular, can be seen as a conflict of interest,” Richards said.
“In other words, if the starting point is not going to be in most people’s best interest to transfer then, of course, using contingent charging infers that you will need to enact to transfer to be able to pay your fees.
“We have urged advisers to recognise that it’s not contingent charging per se, it’s about the managing of the conflict.
“It is about making clear to the consumer that it may not be appropriate and therefore that there is a fee to do that initial analysis and recommendation without any dependency to transfer.
“If the recommendation is to transfer then, of course, the contingent charging model might be the most appropriate and preferred by the consumer. People perceive that utilising contingent charging is a conflict of interest, then in their view it will be.”
Think outside the box on segmentation
Gupta also urged advisers to think outside the box when it comes to segmenting clients.
“Think about how your clients’ needs differ,” she said. “Firms often segment clients on the value of their assets, but is this a strong basis of segmentation?
“What about segmenting clients by their needs and objectives?
“Using retirement income advice, as an example, you may have clients who wish to not run out of income or those who wish to limit the amount of income, so they can pass it on to their children, or those who want to spend more at the beginning and less at the end of retirement.
“All three are likely to lead to different advice structures to meet those objectives. There is no right or wrong way of segmenting, but we say to think about your clients’ needs.”
Historical behaviour
Gupta’s comments come two weeks after Schroders found 63% of financial advisers are reassessing how they classify and group their clients, compared with just 49% last year.
But only 19% segment their clients according to their life stages, with 70% still using assets under management.
