Commission at the heart of fear of RDR

One of the striking things about the debate over the RDR is that of how, primarily, its focus appears to be on the issue of exams and the additional qualifications many IFAs will be required to obtain by December 2012.

Every time I write on the subject, I can almost guarantee that in addition to the many comments posted on Money Marketing’s website, another dozen emails from IFAs, sometimes many more, will drop into my inbox.

Forget the website comments for a minute, it is the emails that are more interesting, mainly because their writers usually provide me with a pen portrait of themselves to illustrate the points they are making.

Virtually none of those emails – and I am happy to be corrected by those who have not given me their ages – comes from IFAs in their late 40s or younger. Barely one or two are from IFAs in their early 50s. In almost every case, they are from advisers who have come to what one might normally consider the end of their working careers.

They are always in their late 50s or early 60s, have soldiered on for decades in the financial services industry and have built up small but financially rewarding careers that, ordinarily, they might have hoped to maintain for up to another decade.

To this small but vociferous group, a requirement for additional qualifications is both costly and time-consuming. They do not know how long they might remain in the industry and are weighing up the costs and benefits involved.

For someone who was intending to stay on a few months or even a year after December 2012, my guess is the decision has already been made.

For others who are intending to stick around a bit longer, the matter is more complicated. If the question they are being required to consider were solely that of taking some exams, that might just about be bearable.

OK, there are 100 to 150 hours of study involved. It might even cost up to a couple of grand to backfill or do whatever is necessary to evidence their new status.

But if you are planning on staying in the industry for at least two or three years after December 2012, then it might almost be worthwhile going through the hassle of sitting down for a few hours with a book that isn’t the latest Frederick Forsyth.

Which is why, for me, I do not actually believe that all the furore generated over the RDR is really about exam qualifications – and why trade bodies that talk about slowing down the speed of its implementation or make vague demands for some limited form of grandfathering are missing the point.

IFAs opposed to the RDR have a totally different matter in mind, for which qualifications are merely a proxy symbol of their frustration and anger.

The real issue that they feel upset about is the one that rarely raises its head in this debate – but which is far more important to their businesses – commission versus fees.

Deep down, the problem is that thousands of IFAs have become extremely comfortable being paid on a commission-based basis. Sure, the more ethical ones will turn down some of the more outrageous payments on offer for sales of certain products. Others will take commission and offset it against fees.

But, for many, commission, become structurally necessary to their businesses and weaning themselves off will be a major challenge, one that many fear they will be unable to carry through.

One of the reasons for this is that, for many decades now, clients have become used to the cosy – and totally unreal – assumption that advice is free and it is only the transaction that might cost them money. As long as that money is not coming directly out of their pocket, they are not likely to complain.

Financial advisers have often colluded with this naive belief and are now getting their comeuppance.

That is why I believe at the heart of all the guff being spouted on the subject of the RDR, the main factor that will drive advisers out of the business will be their inability to convert clients to some form of fee-based model. Or their fear of the same.

It is worth noting here that the FSA/Oxera survey everyone seems to talk about when discussing IFAs departing this industry does not really distinguish between the reasons why they might do so.

If that had been the case, then most of the contributions so helpfully provided by IFA organisations to various Parliamentary committees in recent months about the “denial of access to independent financial advice” allegedly faced by millions of consumers might have a slightly different flavour.

After all, it is one thing to tell MPs that hundreds, if not thousands of IFAs might be “forced” out of the industry because of the FSA’s unreasonable demands for higher qualifications. But it is quite another to have to admit that the reason why the majority might leave is because they are too scared to operate a more transparent charging structure.

Nic Cicutti can be contacted at