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View the article online at http://citywire.co.uk/wealth-manager/article/a748119

Wealth exit fees on FCA radar

by Dylan Lobo on Apr 28, 2014 at 08:09

Wealth exit fees on FCA radar

The Financial Conduct Authority (FCA) has expressed concern on exit fees levied on wealth services, according to the Sunday Times.

The regulator’s worry, which also extends to fund supermarkets, comes amid concerns of the thousands of pounds investors are being asked to fork out to change the wealth provider.

The newspaper used St James’s Place, which charges a 6% transfer fee based on assets held on moves within a year, as an example of how expensive this can get.

On a £500,000 portfolio this would equate to £30,000. The fee falls to 5% on transfers within two years and is cancelled if a client remains with the firm for six years.

Bestinvest and Brewin Dolphin also impose exit charges and Hargreaves Lansdown charges £25 on each exit, while the likes of Standard Life Wealth do not levy a fee.

The FCA told the Sunday Times: ‘We are keeping an eye on exit fees. We expect them to be proportionate to the cost of actually exiting a client. They should not be barrier to someone choosing to go.’

The news comes amid a range of regulatory pressures on wealth managers.

Earlier this month the FCA’s thematic review into adviser charging found 73% of firms were not being clear about the cost of advice. The watchdog also said it could take enforcement action against two firms based on its findings.

The FCA has also recent launched a probe into wealth managers use of in-house funds.

5 comments so far. Why not have your say?

Financialplanner2012

Apr 28, 2014 at 10:01

It is good to see that the regulator appears to accept that a proportionate exit charge is reasonable; although it is not surprising that it took a newspaper to expose the dubious practices of the regulator's favourite, bond-flogging firm.

I recall reading that SJP claims to have received regulatory approval for its remuneration model; so, why didn't the regulator take issue with these 'exit penalty' charges at the time?

Of course, this does beg the question as to why a penalty charge is required if clients are paying a discrete fee for advice received? Or is it that the salesman's income is based on a percentage of the product sold, and that this indemnified income is taken from the product over time by the provider?

I would be delighted if someone could correct my obvious misunderstanding of that company's processes, as the above method does seem somewhat similar to commission ..........

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I.FA

Apr 28, 2014 at 15:42

My understanding of the post RDR SJP fees (on pensions and bonds) is that they are paid by the client over a period of time (SJP lends the client the money to pay the adviser fees). Therefore, there is no 'exit fee' but simply that customers need to settle the debt on exit. Theoretically the 'Partner' has explained in full the cost of the advice which amounts to around 4.5% in cash and 'other benefits'.

ISAs/UTs i believe are still charged a 5% bid/offer of which 4.5% represents the advice fee.

I stand to be corrected on those but i'm pretty sure that's pretty how it is. In that case it should be RDR compliant and the newspaper is perhaps referring to pre RDR policies with exit charges on them. Of course, none of this is really an issue if the customer has been fully disclosed of the charges/fees/commission and agreed to it at outset!

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Financialplanner2012

Apr 28, 2014 at 16:13

@ I.FA (presumably not short for 'independent financial adviser)

Sounds a bit like the MFI sale - interest only credit is offered in order to sell a dodgy sofa at an inflated price.

Still sounds like commission and, as the SJP salesman (the term 'partner' is pure marketing spin) is simply selecting an expensive segregated fund from his limited product range, 4.5% seems incredibly expensive!

I wonder if clients would still agree to these terms if they were asked to sign the following statement:

1. You are aware that your SJP partner (please note that 'partner' is a marketing term) can only recommend products offered by SJP.

2. Your adviser cannot offer other company's products.

3. Have you been offered the opportunity of paying an upfront fee?

4. If the recommendation includes the sale of an investment bond, are you aware of the additional costs involved and why your salesman hasn't recommended a direct purchase (at a lower cost)?

5. Are you aware that 4.5% is very expensive, compared to what you may pay if an independent adviser arranged the same investment?

I accept your point that the above basis may be legal, but is it moral and should clients not be provided with a much more informed choice before they sign on the line?

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I.FA

Apr 28, 2014 at 16:59

@Financialplanner2012

You presume wrong.

I've not tried to defend SJP, only provide enlightenment on their policies/prices.

Clients should ultimately be told of the status of a restricted adviser at outset. Price is what you pay, value is what you get. Ultimately, if a client is prepared to pay £50k for a £1m investment then i would have thought they are getting something more than just a suitability report and implementation. Fair point, it's expensive in my book, but hey, that's for the client to decide based upon what they're getting.

Almost every piece of SJP marketing i've seen (including business cards) has stated that 'partner' is a marketing term and hence my use of quote marks. I don't think that's ever hidden.

I can't say that their fee setup sits well with me at all. I don't believe it is delivered as truly transparent by every adviser even though it is 'legal'. However, that's for the FCA to decide and us to warn out clients of.

I'm very interested to hear what happens with pre RDR commission and turning trail off / exit fees. This could have a huge impact for companies like SJP. Not me though with only about 1% of my fees being trail commission.

I would certainly welcome people being much more informed before signing. I do my bit to ensure they are.

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Financialplanner2012

Apr 28, 2014 at 17:11

@ I.FA

Thanks for clarifying, and I accept that you've tried to be objective. I agree with your supplementary comments, and share your interest as to how SJP will fare when trail is switched off. I do hope that the FCA do not regard them as 'too big to fail'.

In the meantime, we must do all that we can to ensure that clients are aware of the differences between truly independent advisers and sales forces such as SJP.

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