13th March 2017

Advisers’ fees should reflect the scale of the risk they take

If I paid a decorator to decorate the exterior of my house, I would expect their fee to increase depending on the number of storeys of my house. If I wanted them to decorate the exterior of a 20-storey apartment, I would expect the fee to reflect the risk undertaken.

The work may well be identical irrespective of the height but the risk and the potential consequences are not. If the decorator falls from a stepladder, the outcome may be a broken leg, but a fall from a 20-storey block would be fatal.

The fees, therefore, reflect not only the work, but also the risk. With this in mind, consider the risk for advisers of operating under the Financial Services and Markets Act 2000 (FSMA 2000).

Above the law?

FSMA 2000 allows the Financial Conduct Authority (FCA) or the Financial Ombudsman Service (FOS) to act as a quasi-judicial body without imposing upon that body the power to operate within the rule of law.

The Act exempts the FCA/FOS from the rules of evidence, the right to an independent and impartial tribunal and, perhaps the very worst aspect, denies the right of appeal to the open courts. However, it does not deny the right of appeal to the plaintiff, only the defendant: the financial adviser. 

It panders to the ‘lynch mob’ while tying the hands of the adviser firmly behind their back. Is this not contrary to the rule of law? The regulator is not even accountable to elected ministers, as evidenced by Hector Sants at the Treasury Select Committee meeting on 9 March 2011.

The Oxford English Dictionary defines ‘rule of law’ thus:

'The authority and influence of law in society, esp. when viewed as a constraint on individual and constitutional behaviour; (hence) the principle whereby all members of a society (including those in government) are considered equally subject to publicly disclosed legal codes and processes.'

Uneven playing field 

The modern financial adviser operates as an outlaw, excluded from the rules and safeguards that other professionals expect. In historical legal systems, an outlaw is declared outside the protection of the law and denied legal protection, so anyone is legally empowered to persecute them.

FSMA 2000 does just that to those who operate in financial services. We must therefore quantify in financial terms the risk of operating under such terms.

Recent debates on fees incorrectly compare financial advisers with other professionals. Other professionals operate within the rule of law but are not exposed to the same risks. 

To use the earlier analogy, they are operating at ground-floor level. They have the right of defence, appeal, contract law, commercial law and the law of tort.

They are protected by the rule of law and their liability is subject to the statute of limitations, unlike regulated advice, which continues in perpetuity.

Risk awareness

I have heard it said of financial advice that fees should not increase with the size of the portfolio because the work involved does not increase. However, the risk increases in proportion to the level of compensation, just like professional indemnity fees.

Let me allow another professional to express their view. Here is a passage taken from a solicitor’s terms of business:‘The amount of the bill will contain an element based on the value of the estate.

This is because the value is a reflection of the importance of the matter and the consequent responsibility to this firm.'

Unlike other professionals, adviser fees must reflect the responsibility and risks of operating under the FSMA 2000.

Only a regulated adviser is excluded from the rule of law and no other professional needs to reflect this in their fee charges. Those risks increase with the portfolio size.

So when you next consider the cost of your work, think also of the cost of the liability you undertake and how long that liability will last.

Simon Mansell is a Panacea community member and managing director of Temple Bar.

Simon’s article first appeared in New Model Adviser issue 536.

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