Can we have transparency – or is that the wrong question?

The ostensible aim of Retail Distribution Review (RDR) is to make the costs of financial advice “transparent”.  So regulators have tried to ban commissions as part of transparency.

Nice, in theory.

In fact, this won’t help if the wrong things are “transparent”.

Taking this as an organisational psychology  problem, imagine how the regulators would be responding if they asked me for professional advice.

Q. What are you trying to achieve?

A. To stop people getting sold the wrong products and getting bad advice.

Rhetorical question, so why not define the quality of advice given rather than restrict the definition to selling products.

Q. Anything else?

A.  We don’t want anybody, making billions by selling useless things to lots of people and defining it as good because a few people do need it.

Q Have you checked what goes on in the market at the moment?

A.  All the independents sell things based only on the commission that they get.

In a real situation, I’d ask more questions, but let’s see where we are.

About 30 years ago, everybody (lead by Which?) knew the naughty independent advisors sold products based only on commission.  Which? constantly said how good Equitable Life were because they were a “non-commission paying office”, and the National press agreed.

I said at the time, how are Equitable Life “non-commission paying”?  Look at their accounts, upwards of 20 field staff are paid six figure salaries, if that isn’t commission what is it?  Possibly it wasn’t called commission.  Perhaps it was called volume business over-ride, productivity bonus, maybe even Cuthbert.  The fact remains they were paid more, the more product they sold, and that is a pretty good description of what commission is.

It was also said that the naughty commission hungry IFAs didn’t use Equitable Life because they “didn’t pay commission”.  Except I did, because they had an annuity funded for annuity and not cash, and that therefore gave good security (so good for the client and risky for the underwriters that it was a contributory factor in Equitable Life going bust).

I pointed out to finance journalists that you could say Equitable Life were so unsure of their performance quality that they didn’t dare allow IFAs to pick their funds on merit, they had to rely on their salesmen, who could only sell their products, to foist their policies on the public.

Nobody ever explained it that way.

The point is, I was paid to give the best advice to the client.  I therefore had no motive to sell unnecessary products, or sell for commission.  Other people had that motive and could only make their money in that way because a) they could only earn through product sales, b) they were only allowed to sell certain products such as their own or c) they were trying to maximise the commission.

The reality now is that the market still has advisors like I was.

But bearing in mind a decent solicitor, accountant, advisor (or psychologist/coach) is going to cost you upwards of £150 per hour, and the top level ones considerably more – who will spend that all the time?

The super wealthy will.  That’s why some of my clients (who earned perhaps 20 times what I did) didn’t pay as much tax as I did.  They could afford to hire me and people like me to take advantage of all the complicated rules.

The middle range can, sometimes.  Most of them don’t realise it.

Many have already said in response to RDR that “if I have to pay for advice, I’ll do it myself”.

The problem with that is most people don’t actually know where to start (that’s what Taming the Pound was set up for).

And anyway, they’ll still pay like they’ve always done, without knowing it.

When people go to a good IFA they are quoted fees that sound high.  They go into the bank who do it, “free”.  But the bank is using its in-house company, there’s no commission just an inter-unit credit, or some such device.  The bank staff are tied agents, like the Equitable Life staff were, they can’t sell anything else so the “best buy” (and it is buy, because all the regulations are about products, not advice) can be the bank’s best buy, not the best in market.

The bottom range can’t afford advice, so they’ll get “free” advice from the banks.  How well is that going to work?

At this point I’d say to the regulators.

You say you want to stop mis-sales and excessive profits.

What you’re going to do is to increase the mis-sales, because the protection for the bottom end is reduced, you’ll increase bank profits massively and if you think there is too wide a disparity between rich and poor now, just leave it for a few years under this regime of growing disparity between advice quality and purchasing power and see what happens.

And you’ll force out the good IFAs who will be desperately fighting over the shrinking top end of the market, thereby reducing the choice of quality advice to the middle market people who need it.

I think what we really want is a system where people have access to good advice, irrespective.

Good advice costs money.  We therefore need a system that allows good advisors to earn enough money to justify the effort they put into acquiring the appropriate knowledge, and the skills to explain it and advise on it.

The wealthy can pay for it, the middle market can, if it is made widely enough available and we probably need to subsidise the bottom end.

We need to ask the right questions, not “how can we ban commission and be transparent about things that don’t matter”, but “what are we actually trying to do here”?

One idea would be to retain commission as a potential offset option, raise the technical bar to make sure all advisors are competent, ban “own product only” sales and provide some form of means tested subsidy to ensure the neediest can afford advice.

What we need is some invention.

But as the inventor Wallace would say if asked about what the regulators are doing, “Grommet, these are the wrong questions”.

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  • Anonymous

    Great Kim. I have not lived in UK since 1988 but it seems to me that in those intervening years more and more aspects of “life” have become fixated on “don’t” rather than “do”. As a result, I get the distinct impression that those “in authority” have no clear ideas except to view (and treat) individuals as sheep – it’s only the control syndrome that they can understand. Would I come back? I don’t know; probably with my views I would be the number 1 candidate for the Tower Of London!!!

  • Kim

    Thanks Ray,  I think it’s the old thing of the very rich can afford to ignore the law, the criminals ignore it anyway, and the bulk in the middle are the only ones who obey it.  Whether it’s saying “thou shalt not” or “thou shalt”, it’s still only a law/regulation, it doesn’t mean everybody is going to obey it. 
    The way to do it, as I see it, is to focus on motivation.  If you want to get people to do something, don’t reach for the rule book, go to the psychology text and find out why they would want to, if you want to stop them doing something, find out what would make them want to avoid doing it, or want to do something else. Then you can set things up so that the incentives are there if people do what you want, and penalties are there for people who don’t. 
    Put into practical terms, that’s what I think about RDR, transparency, commission etc.  forget about forbidding people or ordering them, work out what you want the situation to be and set things up so that they want to be there too, not give out dictats so that they want to circumvent all the rules you’ve put in place.
    It’s a case of asking the right questions, like, “what are we trying to achieve”, not the wrong ones like “what do we want to forbid”.