Consolidators focusing on ongoing revenue streams could incentivise advisers to needlessly recommend products with an ongoing advice requirement, the Financial Conduct Authority (FCA) has warned.
In the FCA’s latest sector views statement, published on Tuesday (18 February), the financial watchdog raised concerns about advisers being incentivised to recommend products with an ongoing advice requirement instead of more suitable options, particulartly in the event they are planning to sell their business in the near future.
The FCA said: “We have concerns that advisers may be recommending products with an ongoing advice requirement, potentially instead of more suitable options that do not have ongoing fees.
“This may be exacerbated by the consolidation of adviser firms, which has been a trend in the past few years. Consolidator valuations of advice firms are based on recurring revenue streams, which incentivises IFAs to recommend ongoing advice if they are planning to sell their business in the near future.”
On that note the regulator highlighted the “clear trend for advised consumers to choose drawdown more often than annuities, compared to non-advised consumers”.
Strike a balance
Personal Finance Society chief executive Keith Richards said while it was important to highlight misconduct, focusing on the poor conduct of a minority could detrimentally impact consumers’ drive to seek financial advice.
He defended advisers’ ongoing fee models in that they reflected current financial advice business models: “It’s one that the advice market clearly needs to be alert to … [but] … financial advice has evolved into a service where it’s the adviser that is the product, not the product itself. It shouldn’t be underestimated that many of the ongoing fees are in return for that service and expertise that’s being provided, rather than aligning to products.
“Most of the firms I talk to are very conscious to continually review what they’re charging and why they’re charging it. I think most in the market now understand that the regulator isn’t necessarily trying to dictate how much one should charge, it’s just being very cognisant of whatever you charge, you must be able to demonstrate the true value to the end client.”