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An open letter to Nick Clegg on RDR and adviser charging

Dear Nick,

I am writing to you as one of your constituents and as a chartered financial planner and fellow of the Personal Finance Society. I am gravely concerned for the future of my profession, about the public’s access to advice and my own ability to feed and clothe my family beyond 2012.

There are fundamental flaws in the FSA’s plan which must be addressed before the RDR is implemented or consumers will suffer. I stand with the FSA on many of the tenets of the RDR – a higher standard of qualification, clearly defined service propositions and client-agreed remuneration – but the FSA has got it catastrophically wrong in dictating how I can be remunerated.

I am not bemoaning the removal of “commission” nor am I defending opaque product charges I am challenging the ill-thought-out alternative known as adviser-charging. I can see only two outcomes, neither of which seems palatable.

1: Should adviser charges be administrated by the product provider (as it is in the majority of cases) then if this model continues after R-Day, there are significant penalties for the client. For example, to pay adviser fees for ongoing service for a stocks and shares Isa, what was commission becomes a withdrawal, effectively reducing the client’s tax-privileged funds. For a non-Isa collective investment, commission become a withdrawal which is in turn a disposal for capital gains tax which uses part of the clients annual CGT allowance. Multiple funds and products with monthly disinvestments to pay for adviser costs equates to multiple CGT disposals = a significant level of complexity not before seen. There are other examples related to Life Insurance Investment Bonds, pensions and VAT, all examples negatively affect the client through reduced allowances, an increased administrative burden and inevitably increased cost.

2: If an adviser feels uncomfortable in actively promoting the above penal approach, this leaves only one option – to ask the client to pay for your services out of his income, to choose to allocate part of his discretionary spending to pay for financial advice. This will not happen in the majority of cases.

Clients have had a choice to pay by an invoiced fee, paid out of their income, for over five years and elected against it in all but a handful of cases. This is about choice and the RDR is removing choice to the detriment of consumers by dictating to them their options when paying for advice. I can think of no other profession or industry where such Draconian measures have been imposed which curtail options, increase their costs, and increase their admin burden and all in the name of protecting them?

The RDR equals job losses. In January, Barclays announced it is to close its adviser arm with potentially 1,000 job losses. Last month, HSBC declared 650 jobs are to be lost when it closes its tied advice arm. My fear is that if such big companies with all their resources do not feel it is commercially viable to continue to offer this service to their customers, then how are small firms going to be able to continue?

As we career towards the RDR with a forest of known unknowns still ahead, I find myself asking, how can this be? Is it feasible that the FSA did not conduct a critical path analysis of the possible unintended consequences?

David Bashforth
Chartered financial planner and fellow of the Personal Finance Society

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Comments

There are 44 comments at the moment, we would love to hear your opinion too.

  1. Andrew Collier 25th May 2012 at 8:53 am

    Good luck David.

    RDR?

    Reduced
    Demand for
    Regulated Advisers

  2. Some good points well made – but addressing them to Nick Clegg? It might pay to send a copy to someone with influence

  3. Well done David.

    Evryone’s thinkin it, but very few are saying it!!

  4. Excellent letter David – as our practice moves to RDR we don’t see how we can continue to service the majority of our ‘middle income’ clients to the level they have previously enjoyed. Independent Advice will only be available to the wealthy and this is progress.
    Keep up the pressure – its all we can do.

  5. A well written letter by an adviser who clearly wants the best for the client, but no at the expense of common sense.

    Good luck and well done.

  6. Great letter which extols the feelings of most if not all affected advisers. Everyone should do a similar letter to their MP.

  7. Well reasoned David, the problem is the FSA, Mark Hoban and
    even some advisors dont understand the bigger picture.
    A few thousand banking staff seems acceptable but if as predicted (and is happening) thousands of older IFA’s with experience leave the industry then proberbly 4 times the amount of staff will also become redundant.
    That proberbly equates to some 40,000 plus jobs gone with the effect of taking away advise from the majority of low to middle class Britain.

    Does anyone listen???

  8. Good luck indeed but Clegg and Co do not care, or even understand these issues. Hants and a few others have lit the fuse they have always wanted to light and made their escape before the whole thing explodes.

  9. Anything is better than nothing, but the real problem is not being addressed! Products are created by product providers and they remain unconsumed unless the product provider is prepared to pay some more money for marketing and distributing. It should be a cost to the product provider! Under the current system this cost is absorbed in “commission”. Unfortunately, this cost has always been passed off as “cost of advice”. It is NOT the cost of advice! Getting rid of commission will not get rid of this cost the provider will need find. But getting rid of commission will decimate the IFA distribution channel.

  10. Please keep us updated on the reply to this letter and we should then all back this constructively as a collective,to ensure consumer choice is maintained. The RDR is significantly detrimental to all concerned and will have serious ‘unintended consequences’. Regulation is needed but has gone too far and has effectively demonised advisers to the extent of encouraging apathy towards savings. The FSA website’s first page asks” Are your savings safe?”. Well, certainly not with you lot at the helm! Since 1997 thousands of jobs, careers and pensions have been lost as ‘red tape’ and downright arrogance has made it easier to borrow money at 4000+% than it is to take out a savings or pension plan. Thatcher destroyed the Unions and the Mining Industry but Brown, Blair,Cameron and Clegg have planted their heads in the sand while an industry responsible for 9% of GDP is destroyed with total disregard for the victims and their families. Good Luck.

  11. Well written. RDR fee charging will be a significant barrier to advice on pensions and investments its sheer madness.

  12. Sean Reynolds 25th May 2012 at 9:24 am

    Well put David, my views on RDR are very similar to yours. I judge how clients will react by looking at my own behaviour, I have a SIPP direct with a SIPP provider. Each year I get an invoice which I can pay personally or deduct from the fund, what do I instinctively do? I pay it from the fund. Does that make sense? I think so, even though I can reclaim the VAT. If I make a contribution equal to the invoice I get 40% relief, if I pay it myself it is from income taxed at 40%. Most of my clients do the same and should keep the right to choose.

  13. Simon Robinson 25th May 2012 at 9:28 am

    Some good points but surely taking 0.5% trail commission is no different to taking 0.5% adviser charges for ongoing service. Both reduce the value of the tax privileged account

  14. Anonymous of 9.28 is spot on – fee//CAR/trail. Makes not a jot of difference if the amounts are the same. Of course, many advisers are using RDR as a means to charge more money (1% typically) than the ‘normal’ trail of 0.5%, which is fine but only if they are adding extra value for it.

  15. so where are we? yes after failing to control the financial actions of the banks and unacceptable risky product offering of some providers the FSA are to go, only to be replaced by another body who will repeat history until the next body is created, the Gov and the BOE dont have an original thought between them so its musical chairs for professional advisors and investors, when the music stops we get to pay for fewer chairs while the money goes to the ”new body”, ps not to mention the cost of bailing out the banks in round 2 when the euro falls apart!

  16. Good Letter. David. Would you mind if we copied this and everybody sent it to there local MP. Might cause a stir ?
    Best Wishes

  17. What will happen in practice is many advisers won’t understand or engage with your points in (1). Unreported CGT liabilities will build up, some will be picked up eventually by HMRC, but many won’t. Very few small IFA firms will be able to afford the administrative capability to deal with all this, so as usual, the focus will be on sales and generating revenue, and the rest will be fudged. It will become an utter nightmare that will be impossible to monitor effectively. And of course the losers will be clients. 2013 could be rather challenging for all the wrong reasons.

  18. I agree with Anonymous of 9.28 and Steve Laird on the point about tax privileged funds. A client’s ISA is no worse off whether he pays 0.5% in ongoing fees or the fund pays a 0.5% trail.

    Plus, most providers now allow initial fees to be paid out of non-ISA funds, again maximising the tax-privileged situation.

  19. Years and years of wasted time at the hands of a reckless and incompetent regulator under a group of feckless, weak and ultimately stupid politicians. We have ended up with a pigs breakfast of a situation with the only real long term consequence being the lack of any real beneficial financial advice being available to those most in need of it. Fantastic, a sloth with a Crayola could have done a better job.

  20. I’ll come clean on being anonymous of 9.28. Wrong button!
    Re the CGT issues, most investment platforms will use a Cash account and a small part of the portfolio can be held there to provide adviser charges and any other costs. It will have a minimal effect on the performance and can be added to when necessary through structured withdrawals from funds. In that way any CGT liabilities are easier to work out.

  21. @Simon 10.51. Your process may still make CGT easier to work out but still causes a CGT problem that trail commission does not. Considering most users of Unit Trusts are probably not willing to try to work the liability out for themselves they are likely to use an accountant – and have to pay for the priviledge. The RDR has so many flaws it defies belief that the founders of it have managed to get it this far.

  22. Good letter. Could I say that at 65 I will exit in December. However here is the offer. If sense prevailed I would continue on AND hire two school leavers and train them in all the things I have learnt in finance since 1965.Money is not my biggest interest. We must create jobs !! How about it Mr Cameron.

  23. David Bashforth 25th May 2012 at 11:37 am

    Thank you for your messages of support. I wrote this letter out of frustration that I could not see any of our trade bodies, networks or providers raising these issues. I wrote to Nick Clegg as he is the MP for my constituency and I was hoping for a little personal accountability ( perhaps misguidedly ).

    Simon et al, I take your point about ISA’s, 0.5 is 0.5 but it will be interesting to see whether the new share classes without
    trail fully pass on the reduction in amc to the client.

    Lastly, I would take great heart if as many people as possible would sent a similar letter their MP ( use mine as a template if you will ).

    Common sense must prevail.

  24. Richard brydon 25th May 2012 at 12:43 pm

    I once supported the LibDems but my MP had no idea about what I reported to her regarding our regualtor and RDR and merely came back with the usual: Sorry, we can’t help. It’s the FSMA 2000 you know.
    When Nick Clegg wrote me ( and many others) asking for cash to support the party recently I replied with my reasons why I could no longer do so. I didn’t get a reply. Funny that.

  25. RDR always was about TAX and HOW TO RAISE IT.

    These are not unintended consequences at all – it was just was was intended.

    Do you think Gordon Brown & Co ever cared about the private investor when he pillaged pension funds as soon as he came to office? Of course not. All he care about was spending money to finance his wild Utopian dreams.

    We’ve been trying to persuade socialists not to raise tax. We’d have been better off getting them out of office — it’s only by doing so there will be any hope of normality returning to the financial advice sector.

    As for today’s announcement about ‘free banking being dangerous’, who says so? Of course! It’s the same people who completely missed the financial crisis.

    They don’t know the meaning of the word ‘dangerous’.

    Love and kisses

    Larry

  26. Why bother? MPs have their eye on promotion within their party and/or garnering support at the next election. The views of one or two minority perople is not going to change his or her mind. When your own MP readily admits that the FSA is not really a concern for her – she is more concerned and ond only has time for the serious financial issues facing the country – then you know stuff all will be done.
    I may be cynical but now I do not waste time writing letters and spend my time doing something more positive and rewarding.

  27. Well Said, David,

    Coulden’t agree more with you, but i would say, consumers interests come after political ideology, so don’t expect anything to change.

  28. More importantly, Messrs Clegg and Cameron – given that not an eyebrow is raised by the dumb cloth-eared FSA heads in sand ostriches who listen to no one and understand little – wake up to the colossally damaging effect on the UK economy of RDR when the UK needs it least. Other countries must be laughing at our self destruct Financial Services weapon – the FSA and ineffectual non democratic country allowing this to happen.

    The massive loss of jobs to come created by the FSA in the Financial Services sector is slef created by the FSA – no one else but them, this is NOTHING to do with recession or the poor economy but self purpose of the FSA policy making for the last 5-10 years.

    Warning : You cannot lose 20% or more of advisers without also accounting for the huge loss to our economy (50-100 Billion in lost revenue at a loose estimate) and drive a hole through our UK GDP/ Balance of Payments figures. This means 20% less business to providers, 20% less service to orphaned clients, similar deductions in tax take to the Exchequer, 20% less IFAs giving advice / new business to investment houses and insurance companies and platforms, so ultimately squeezing profit margins and losing jobs.

    Congratulations FSA nice job. Congratulations Cameron and Clegg too for letting it happen under your watch. Oh you didn’t know about this sorry I forgot. Well done and thank you with further angry mocking sarcastic congratulations to Brown and Blair for creating the FSA, selling our family gold in Labour’s disastrous 10 year reign in destroying the economy and letting the lack of regulated banks rule our lives via austerity over the next 15 years . No finger pointing elsewhere, IT WAS YOU LOT so no wriggling out of it!!!

    So having worked out a formula for all of this:

    Cameron + Clegg = Brown + Blair = FSA Failure = Financial Services Sector Failure and Economic Failure Past and Present = No Change There Then

    Simples. Even a Meerkat could understand that one but then again when you have got gold plated pensions like the FSA Cameron Clegg Brown Blair or the FSA, what’s there to worry about. What a useless waste of time and money all of them are, while we suffer!!

    From a fully Chartered fully qualified IFA– at least the Azerbaijan recruitment thought police will be sure to be headhunting some ex FSA staff upon leaving their posts- assuming the lure is lucrative enough to meet their extravagant lifestyles.

  29. Whilst it’s a useful summary of the likely consequences of RDR, I’m not of the opinion that it’s “well written” in terms of getting the response you want.

    I’m going to be blunt here – these are not my actual views, more the standpoint that will be taken by a pro-RDR reader – the entire letter reads as a “poor me.”

    You start by saying you won’t be able to feed / clothe your family; that no-one will pay you from their income for advice, and; that thousands of adviser jobs will go.

    From a political decision perspective – so what? You make no attempt to quantify any customer impact. Which, for a letter purporting to champion the consumer, is frankly odd. In fact, from a financial perspective, one possible outcome from all of those things happening is that customers get a better deal (fewer fingers in the pie means more share of profits get passed on).

    Some attempt to position this from a customer perspective may have helped the political reader to make a more balanced decision. X% of annuity customers will get Y% less income, for example. Or “XYZ provider has stated their intention not to pass on the savings to customers” – meaning the post-RDR position is explicitly a loss for customers.

    Anything which would have made the letter read less as IFA propaganda and more like the consumer-focused letter it’s pretending to be would have been an improvement.

    And for what it’s worth, no, I don’t think the post-RDR position will be a “win” for many customers without some fairly major changes. Trusting providers to “play nice” is just too naive.

  30. Whilst I commend wholeheartedly David and David’s letter,

    what I find very hard to understand is that it has taken so long for so many to realise the train wreck/dog’s breakfast RDR actually is !!

    Some of us have been warning (and trying to do somthing about it albeit forlorn attempts given the nature of the regulator and its lack of accountability) of the impending train crash for something like 5-6 yrs and here we are 6 or so months away from the train hitting.

    Its like watching a disaster movie in slow motion !!

  31. Well done and good luck also.
    Potentially if you look at all of the jobs lost not just Barclays and HSBC but numerous other companies along with future job losses. Maybe the FSA needs to add are your jobs safe alongside are your savings safe?

  32. I am sure many of us have written to our MPs…..time and again.
    Sadly, the only answers we get are much sympathy, handwringing, but admission that they ‘cannot do anything’ about the FSA’S policies.
    I have given up writing to my MP Jacob Rees -Mogg. It is simply not worth my time any more. His last letter to me ‘threw in the towel’ as far as he was concerned. There was nothing more he could do. This was despite exhorting him to talk to fellow MPs and ask why the power of Parliament is being overarched by the power of sants, nicholl and that sorry bunch, thumbing their colllective noses at select committees with serious concerns about RDR.

    I am at the stage now where if I find that the demands of RDR are a burden too great, I will just throw in the sponge. I’m 54 and really a stroke or heart attack is not worth it .It’s a bit like living under a dictatorship; you just knuckle under the yoke, and if it gets too much, you just try and make your escape.

    What I would entertain is joining in a mass refusal to pay fsa fees or the fscs levy. I just wish it could be organised.

    Happy days…..NOT

  33. Whilst agreeing with the tone of the majority of these responses, I despair that, once again, these crucial issues are being discussed ‘in house’ :- four pages of ‘preaching-to-the-converted!

    If, over the past few years our profession had done more to press the case of quality, Independent advice we would might not have found ourselves backed into such a tight corner. The public, our potential clients, have been led to believe that if you speak to a financial adviser who isn’t employed by a leading bank, they are opening a Pandora’s box which will leave them and their families destitute. The regulator, in all its guises, has perpetuated this myth, along with the financial media, despite many, many independently commissioned surveys refuting this.

    IFA Promotions, Association of Independent Financial Advisors, SOFA – all have shown themselves to be unfit for purpose in this regard.

    A response from Nick Clegg will certainly raise the profile of the issue (and, of course Money Marketing) if it is picked up by the National press, however I think it unlikely that we will hear from the Deputy PM. Might I suggest that David’s letter would reach a more realistic, and relevant readership if it appeared in its current format as a full page, paid, advertisement in his local newspaper. This could then be replicated by groups of IFA companies in regions across the country, and would inform the public/clients about what is being done ‘for their own protection’.

    Of course, this would mean that regional IFA firms would need to speak to each other to organise such an action, which would be a feat in itself. Then again, if we can’t find a way to work with and trust each other, how can we expect the public to – and pay for the privilege?

  34. Malcolm Coury 27th May 2012 at 9:41 am

    It does seem ridiculous to throw the baby out with the bath water, i.e. commission in itself is not a bad thing, and in the vast majority of cases ethical advisers have made it work for their clients for decades. Rather than removing the commission option for advised sales, it makes far more sense to regulate the maximum amount providers can pay. For example, common sense dictates the maximum initial commission for an investment product should be 3% and provided the work justifies it – not 6% or 7% which has been abused by a range of less ethical advisers and organisations under cosy and usually tied or restricted agreements. Take that further, commission payments could be tiered, e.g. 3% on the first £50,000; £2% on the next £50,000 and so on. Very simple solution and one that helps protect customers and reward advisers.

  35. A very well written letter I would like to think will provoke thought and action before it is too late. But I fear we are shout loudly at an empty gallery, the unintersted audience having already left.

  36. I am sorry to say that you are incorrect with respect to advice fees been chargeable for CGT for non ISA investments as professional fee are allowable as a cost before a gains are calculated! There maybe a case for BONDS which the reveue may have to rule on but policy fee and management fees are allowed and I don’t think it would take much to include advice fees

    I think that this high lights the need for higher standards and the need for minimum exams and closing loop holes like financial planners that have choosen

  37. Well done David – although, sadly, I believe it’ll be on deaf ears.
    A good letter and with your blessing I would like to use your words to send to my local MP – and would urge everyone else who has read this to do the very same.
    27 years in and I’ve never felt so unhappy with this profession.
    They say “don’t let the B’s grind you down” – well they’ve done a bloody good job as far as I can see.
    Good luck with it David

  38. A good letter and covers the tip of the iceberg.
    These points have to be immediately addressed and if they remain unresolved then RDR should be delayed or stopped.
    Enough said.

  39. I think this open letter just proves that we need higher standards within financial services as the information within it is clearly wrong and is also showing the biased point of view of commission.

    1. Adviser fees are tax-deductible for CGT purposes and therefore will give no detrimental effect for the client.

    2. Withdrawals from ISA in respects to adviser fees and trail commission would be exactly the same and therefore has no detrimental effect on client contributions.

    3. As regard a client being too lazy to calculate their own CGT liability on the unit trust or OEIC surely that is the reasons why they are employing a financial advisor in the first place.

    4. I think this article highlights the reasons why our industry needed RDR in the first place to stop some advisers selling expensive Investment Bonds in favour of more tax efficient investments particularly the basic & non rate taxpayers. I have no doubt that in some circumstances deferred tax investment for high rate and higher rate tax payers are of huge benefit but how many clients actually use their ISA allowances each year and how many others use their capital gains tax allowance in full. If we are proposing to represent the masses surely we should be looking at simpler examples rather than just trying to use RDR as an evil system that will stop some advisers from selling investment bonds to the wrong people.

    5. In respects to investment bonds we already have policy fees and even management fees paid that are paid for by cancellation of units so I don’t see that the Inland Revenue is suddenly going to penalise a client for cancelling units to pay for adviser fees. Particularly as RDR does allow for adviser charging within products. Surely this is just an issue for providers to update their IT systems and haven’t they had four years to do that.

    Before you send an open letter like this on behalf of the industry maybe you’d like to get your facts right and that might actually impress the FSA

  40. Nigel Barker-Smith 28th May 2012 at 1:10 pm

    If people don’t value paying for advice, it’s up to you and your business to design a proposition that people will. No point writing to someone asking them to change the rules just to justify your income.

    This is industry is being found out to be what it has always been, excessive fees hidden/masked within a product because It can’t be justified any other way.

    A client should be paying the same whether its fees or commision, so whats the problem?

    Anyway I thought we were financial ADVISORS because advice doesn’t necessarily always mean the need for a financial product.

  41. Incompetent Regulators Award Team 28th May 2012 at 4:34 pm

    Although I totally agree with the sentiment of this letter, I do not wish to take the momentum away from the bigger picture of bringing this rotten RDR to light. However, I disagree, like some others have voiced on the technical points of the CGT on the ISA etc.

    My point here is that this fully ready RDR qualified IFA got this wrong! So what does the extra studying offer the the consumer, in this case nothing more than what we have as mistakes can still be made by the adviser.

    However, I will not castigate this man for getting something wrong as his intentions are good and I’m sure he will put this right. But it just goes to show exams are only for the moment in time and nothing but more bullsh*t jobs for more pen pushers with non jobs!

  42. We have no idea if David is RDR qualified as you can be a member of the Personal Financial Society and not be RDR ready. If he is than the PFS need to look at his CPD tim.

  43. David Bashforth 3rd June 2012 at 7:41 pm

    I’d like to address the comments of Peter Herd et al who raise a fair point about CGT. However, my understanding of CGT rules ( subsequently double checked ) is that costs for professional advice are allowable for CGT relief in so far as they are incidental to the purchase or sale. If the sole reason for the sale is to pay an advisers fees for ongoing service then is this an incidental cost? I believe not, but I would welcome clarification here. In any event you can not escape the point that taking a charge from the clients fund post RDR is a disposal for CGT purposes and must be accounted for.

    With regard to the ISA point, I accept that a 0.5% trail commission or a 0.5% fee should leave the client with the same fund value, however that is assuming fund managers create new share classes that fully pass on the reduced cost. I also looked at it from a clients perspective, a physical withdrawal from their ISA to pay for advice = less funds in the ISA.

    I sincerely hope the tone of my letter did not come across as pro commission, I am not. My point is that RDR brings additional tax complexity which is unwelcome, and I have not yet even mentioned VAT.

    I’m happy to debate any of these points further should anyone wish to do so.

  44. David Bashforth 6th June 2012 at 11:49 am

    Further to my last comment I thought I would share some web links which seem to confirm my thinking with regard to CGT.

    Firstly a article from IFA online reporting on the IMA’s head of tax Steve Lynam speaking at the 2011 PFS conference.

    http://m.ifaonline.co.uk/ifaonline/news/2073495/ima-adviser-charging-perverse-tax-implications

    Secondly, I have taken this from the HMRC technical pages in relation to GGT and professional fees. My reading of this seems to conclusively support my argument.

    http://www.hmrc.gov.uk/manuals/cgmanual/CG15280.htm

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