RDR could reduce Omo usage further
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The Retail Distribution Review is likely to see fewer pension savers exercising their open market option, according to Fitch Ratings.
In a special report on the RDR, the ratings agency says the fact customers will be faced with explicit fees for investment advice will drive some
away from the IFA sector.
Senior director for insurance David Prowse says: “Customers will be faced with explicit, direct fees for investment advice - something they may currently perceive to be free because charges are somewhat hidden within premiums.
“We believe that the new transparency will drive some insurance customers away from the IFA sector and towards cheaper, restricted advice or no advice at all, and pension savers may be less likely to exercise their open market option when converting their savings to an annuity at retirement.
“Although most annuities should be easy to compare, some customers may not be aware that they can easily look for a better annuity deal themselves, without having to consult a financial adviser and pay the charges that this would entail.”
Fitch believes the switch to adviser fees should end commission‐driven sales and in theory increase trust in advisers. But the firm does not expect this to be a significant outcome in practice, given many consumers’ scepticism towards financial services.
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Readers' comments (20)
Anonymous | 23 Feb 2010 1:17 pm
As recent surveys have shown people do not want to pay fees. If only the FSA listened to consumers and got off its high horse and did the job it is supposed to do
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Anonymous | 23 Feb 2010 1:26 pm
On the contrary i have found that clients from all walks of life will pay a fee for independant advise if the option is given to them in an open and positive maner.
I have been working a RDR model for some time now and have been suprised at the response from clients when discussing the fee option
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Joe Kirby | 23 Feb 2010 1:30 pm
Given that annuities are about the only area where products cannot be unravelled if someone gets it wrong, and commission bias is largely irrelevant as most companies pay exactly the same for standard products - perhaps this is yet another area where RDR is doomed to make things worse for all concerned except the pension plan providers who offer derisory terms for maturing plans?
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Anonymous | 23 Feb 2010 1:37 pm
It is all part of the FSA process to ensure that there is less misselling. As clients cannot afford to pay anyone to sell them anything there will be a clear reduction in the incidence of misselling. And, of course, it continues to be those in society who have the least who suffer most. If only we had a regulator who considered the effect of its actions on consumers!
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David | 23 Feb 2010 1:40 pm
It shouldn't make much difference. The commission payment was factored in to the pricing. So, taking the fee initially from the pot will reduce it compared to factoring but not by enough that most people will notice.
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Anonymous | 23 Feb 2010 1:41 pm
People believe that paying by fee is the cheaper option and they will only choose that route if that proves to be correct. At the moment people can make that choice, however post RDR that choice is removed. This is actually discrimanation against those clients who would prefer us to be remunerated by commission and will ultimately result in clients being worse off.
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Anonymous | 23 Feb 2010 1:42 pm
Hopefully the 1:26pm contributor is better working the numbers than the grammar and spelling - 5 mistakes in such a short contribution is a pretty poor!
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Anonymous | 23 Feb 2010 1:45 pm
The RDR won't help with the take up of OMO's.
I don't understand why commission is payable if the annuity is sold without advice? Can someone explain please?
The FSA RDR consultation papers don't seem to mention annuities at all.
I would have thought that this is a regulated activity and comes under the RDR commission ban AND the higher qualifications requirement if the client is retail.
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Alan Lakey | 23 Feb 2010 1:56 pm
A 2005 report by Charles River Associates into the effect of commission commented that perception guided opinion more than reality.
Consumers have a perception that indpendent advice costs them money even if there is a saving or other benefit as a result of taking the advice.
Regardless of whether we favour commission or fees there is a consumer-driven perception that commission = free advice and fees = a cost. Therefore it is certain that the RDR will reduce the amount of OMO due to consumer perception.
Yet again an instance of the consumer suffering detriment due to policies supposedly implemented for their benefit.
"Ouch, it hurts" shouted the consumer.
"This is for your own good" replied the FSA.
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Julian Stevens | 23 Feb 2010 2:03 pm
We charge fees (nominally £125 per policy/scheme) and commission (sometimes reduced, given that it ranges from 1% to as much as 2.25%) for vesting exercises. Anything less simply isn't commercially viable.
Most clients are so totally flummoxed and bewildered by the paperwork that they don't consider a reasonable fee to be unacceptable. And if they do, you just "advise" them to shop around if they think they can find anyone else to to the job properly for less.
Then again, if the FSA did its job properly and insisted that ALL providers MUST include with their pre-retirement packs a standard format A4 sheet explaining in simple, unambiguous terms the benefits of seeking whole of (open) market advice, then only the lazy or the stupid would just buy an annuity with the host provider or allow themselves to be railroaded towards an annuity with the likes of Prudential or L&G by way of some cosy deal at corporate level.
The FSA will never do this. Why? Because it would constitute an all but unequivocal statement to the effect that whole of market independent financial advice is best and to do that would upset their cronies at the banks.
So the mess and muddle and "poor consumer outcomes" continue, despite all the phony hogwash of the RDR.
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