Apocalypse Now? The future of financial advice post RDR

2nd November 2010

The FSA began the consultation period back in June 2006 with the aim being to improve consumer trust and confidence in financial products and services. In order to do this they came up with three fundamental measures :

•improve the clarity with which firms describe their services to consumers;

•address the potential for adviser remuneration to distort consumer outcomes; and

•increase the professional standards of investment advisers

Clearer description of services

The problem at the moment is that it is not always clear to consumers whether they are receiving fully independent advice or advice that is based on a limited range of products and providers.

Once the RDR comes into force all advisers will have to make clear from the outset if they are offering independent or restricted advice.

Martin Bamford, managing director of IFA Informed Choice, has already implemented many of the new requirements well ahead of schedule. The measures his firm have taken are described in a recent interview with IFA online.

He says that the new independent and restricted advice tags signal a move back to a simpler regime, similar to the old independent and tied distinction which was pretty well understood by consumers.

"Some confusion will undoubtedly be created by those restricted advisers who claim some sort of pseudo-independence in the presentation of their services, as we know some multi-tied advisers manage to get away with today.

"It will take clear guidelines from the FSA, coupled with regular checks, to make sure consumers are being told an accurate story."

Removing the conflict of interest on commission

Many advisers are currently paid out of the commission on the products that they recommend. This creates a potential conflict of interest and a lack of transparency as consumers may not realise how much they are effectively paying.

From the end of 2012 firms will have to be upfront about what they are charging for their services.

Bamford says that one of the biggest misconceptions circulating about the RDR is that the commission ban means consumers will have to pay fees for advice after 2012, but this is simply not the case. 

"The new rules introduce ‘adviser charging', which means that advisers can continue to provide advice for ‘free', as they do today, and take their remuneration out of product charges.

"All that changes is the ability to factor commission payments internally, in the form of indemnity commission."

He makes the point that this should remove a lot of the smoke and mirrors associated with investment products, particularly for lump-sum investments, where commission has been entirely redundant for years.

Another common concern is that charging fees will put many people off taking financial advice. Bamford doesn't agree and says that in his experience, investors will pay fees when the advice is well presented and they understand the value.

"When a client does not accept a fee proposition it is the fault of the adviser for not articulating their value well enough. If you pick the right market and develop a powerful proposition there is very little resistance to paying fees for advice."

Increase the professional standards of advisers

The FSA is also looking to increase standards within the industry by insisting that advisers are better qualified to do the job.

Bamford acknowledges that the new qualification standards are a more robust test of competence than the old standards. "The writing has been on the wall for over a decade that consumers deserve a more thorough assessment of competence."

He believes that moving from level 3 to level 4 as the benchmark is a step in the right direction and that forward-thinking advisers will already be making the move past level 4 to level 6 qualifications, as the move towards higher professional qualification standards gathers momentum.

"Qualifications alone will only go so far. It will be the combination of higher qualification levels and relevant experience that will improve general standards within the sector. Experience alone has about as much value as qualifications alone."

Unintended consequences and opportunities

There is a lot of disquiet in the industry about the impact of the RDR, but a recent report on Fund Strategy suggests that the message is not getting through to policy makers.

Bamford however is relatively positive and thinks that the RDR should be a big step in the right direction in terms of achieving the original aims set out by the FSA. He doesn't believe that the unintended consequences will be as dramatic as those who oppose the RDR have forecast.

"Those who embrace the RDR are presented with a whole raft of opportunities. In fact it is those firms who have already made the switch to fees or adviser charging, obtained higher level qualifications and formed a value proposition that can spend the next couple of years building their businesses by acquiring the right target clients and growing their assets under management."

The competition from other IFAs who have not yet made the transition is likely to be sparse between now and 2013, as they devote their available energy to exam study and developing new service propositions. 

"This is one event where the prepared should profit."

The product provider's perspective

One area where the RDR is likely to have a big impact is on the number of passive investment products that are sold in this country. Unlike actively managed funds these do not involve the payment of trail commission to advisers. This can act as a disincentive for those firms that don't charge a separate fee.

When the RDR comes into force it will make the adviser's remuneration much more transparent, with each firm having to agree its charges upfront with the client. Phil Reid, UK head of external and private bank distribution at HSBC, believes that this will result in more sales of passive funds and ETFs.

"I think we will see a greater focus on value for money, with more IFAs using passive investments to build the major market exposure. I still think that active funds have a huge role, but they will have to work harder to justify the higher fees."

The UK has a lot less take up of passive products than the US so there is every chance that once the commission anomaly has been removed the proportion of sales will increase.

"I think the RDR will achieve its aim of greater transparency and instil more of a focus on value for money, which is to be applauded. The risk is that it could almost go too far with consumers looking at cost as the be all and end all, whereas what they need is the most appropriate product for what they are trying to achieve," concludes Reid.

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