In a report on adviser charging published today, JP Morgan warns firms who have previously operated on a commission-only basis will now have to consider VAT implications when they move to an adviser charging model.
Advice given to a client which does not include a regulated product recommendation is liable to VAT, while arranging products for a client, also known as ‘intermediation’, is exempt from VAT.
JP Morgan says: “The main challenge for advisory firms is to be able to show a tax inspector in clear terms what is billed as advisory work and what is billed as implementation. This underlines the value of a charging model where ‘advice’ and ‘implementation’ activities are charged for separately.
“However we are concerned that the VAT rules, as they currently stand, could have the unintended consequence of encouraging firms to execute product transactions, which is sharply at odds with one of the main intentions of the RDR, namely to remove sales bias from the advice process.”
Firms are only liable for VAT once their VAT-able turnover for the previous 12 months exceeds a certain threshold. The VAT registration threshold for 2011/12 is £73,000.
Income from VAT-exempt work and trail commission for business before 2013 should not count towards the £73,000 limit.
The report also includes research on attitudes to adviser charging based on responses from over 2,000 consumers. JP Morgan found that the average one-off cost that respondents were prepared to pay for a complete financial planning review was £371.
Advice reviewing all investments and pensions was expected to cost £324, while ISA advice was expected to cost £258. Advice on pensions was expected to cost £256.
IFA firm Affluent Financial Planning, profiled in the report, put the cost of a financial planning review and report at a minimum fixed fee of £750, paid upfront. Concept Financial Planning, also profiled, meets the cost of producing a client proposal, and charges an hourly rate of between £90 and £250 an hour, charged on a fixed fee basis, for full recommendation and implementation.
JP Morgan says: “ Consumers either admitted to not knowing what financial advice should cost or significantly underestimated what the price of certain tasks should be.
“We would attribute the fact that consumers said they would be willing to pay £371 on average for a full financial planning review to a lack of understanding of what is involved in the advice process as much as resistance to paying a fair price.”