Remuneration - changes ahead?
Whilst the RDR will usher in a large number of obvious changes to the financial planning industry, it may also have an impact in other areas, notably how advisers are remunerated.
Back in September, Martin Wheatley, MD of the FSA and CEO of the FCA, announced that he wanted to see an end to the mis-selling scandals that have plagued the industry caused by sales incentives. Discussing a review of 22 firms’ incentive schemes (covering banks, insurers, building societies and investment firms) he outlined a number of major failings including:
Most incentive schemes encouraged mis-selling
The risk of mis-selling not being properly managed or monitored and,
Sales Managers with conflicts of interests
Whilst many scandals, such as PPI, are very much seen as problems caused by banks rather than financial planners, we have spoken to an increasing number of financial planning outfits who believe that major changes will have to take place as the FSA/FCA ask firms to adopt a different approach. In brief, there seems to be an expectation that IFAs/financial planners will in the future see a shift from earning the majority of their income through bonus to earning the majority through a basic salary.
We work with a number of practices who have already moved to a situation whereby their advisers are paid increasingly well e.g. £50,000 and above, receiving an annual discretionary bonus based on personal performance, the company’s profits and a variety of KPIs. Whilst common in many investment management firms, this approach factors in issues such as file quality rather than focusing solely on sales figures, enabling staff to be rewarded for the professionalism of their work. This can arguably reward advisers who undertake high quality work, appease the regulatory authorities and leave clients in the position of knowing that the income of their consultant is not overly reliant on them making a sale or charging time out to them.
From a company’s perspective it also makes sense, easing cash flow issues and enabling them to reward people in line with the practice’s fortunes. Further it will allow them to reward those who perhaps have performed admirably, without having seen the benefit of this in terms of overall production.
However it is not without its detractors. Personal experience in this area would suggest that a large proportion of financial planners are wary of discretionary bonuses, believing (perhaps some time correctly) that discretionary can sometimes mean zero. Such advisers are used to being paid a salary of £30,000 - £40,000 (outside of the South East; slightly higher within) and then validating that salary, usually by 2 to 3 times, to earn their bonus. It is obviously a very transparent structure, enabling every planner to know exactly how much they will earn depending on their overall production. However the regulatory authorities seem to believe that in some circumstances it can discourage best practice.
This is obviously another contentious issue and one that many IFAs will refute. As in any industry, the majority of practitioners are honest individuals doing the best that they can for their clients. That said the FSA/FCA have clearly seen issues within all areas of financial services and feel the time is right to act. As with the RDR in general, the biggest change will need to be cultural.
For those seeking IFA jobs or financial planner jobs wishing to speak with an Exchange Street consultant about this or any other issue, please do not hesitate to get in touch.