Money Marketing editor John Lappin predicts a scenario in which IFAs – the dying stars of the financial advice cosmos – collapse under the weight of the RDR, leaving huge numbers of clients with nowhere to go
The FSA believes that if IFA numbers fall, due to the effects of the retail distribution review, they can be replaced by primary advisers.
But has it asked the clients? Not the mythical clients on the back of the envelope where the retail distribution review was first dreamed up but the real people who use IFAs.
Will these clients want to go to an adviser who does not have to apply what we might call full suitability but something that is quite suitable? Let us ask these clients if they want to go to an adviser who has not applied full suitability, who will be free from challenge at the Financial Ombudsman Service and prone to all the excesses that commission encourages – at least according to the FSA.
If this primary adviser works for a bank, it is clear the regulator will have been given many assurances that if anything goes wrong with the primary advice, then the bank will recompense investors.
OK, so this person – a former IFA client – will receive compensation because of a dodgy product sale or perhaps a decent product sold dodgily if the FSA deems it so and the bank agrees. But what if the bank does not agree.
What if the definition of not fully suitable but not unsuitable is a matter for debate? The FSA and bank see it differently. It is not as if any dictionary of the English language can cope with this concept.
Even if the bank and FSA do agree, what sort of regime does the regulator envisage where customers are possibly going to be sold rubbish and then compensated later? It is hardly going to build trust in savings.
But I digress. Back to that IFA client about to become a primary adviser customer. What if this client has many types of funds? He needs advice on his ailing pension, a foolishly taken out endowment now in a closed fund and on his spread of other investments placed on a fund supermarket.
What if this person has family income benefit protecting his wife and three children? But his primary adviser wants to sell him some term insurance, can advise on a guaranteed equity bond and two or three other types of investment including – who knows – a reworking of with-profits.
That is no replacement for what is probably decent IFA advice. If this person has remained a client, let us assume he is happy with the advice he has had.
In this scenario, how long will it be before something is inappropriately churned into something in primary colours, serving simple needs but which could be complex. The RDR as a churners’ charter – now would be an irony.
One could easily make low-cost with-profits endowments, precipice bonds and zero funds fit that definition. But what if the FSA does not allow such a line up of products to stock a primary adviser’s shelves and restricts the sales to, say, what Ron Sandler suggested, like balanced managed funds?
What might the client say? He or she might say, great, no problem, but will probably walk away from this primary adviser. And to what?
Perhaps the answer for this client will be to pay a fee to a professional financial planner. But this client is stubborn, has never paid fees and does not want to start. The price may have gone up as the overall full advice market shrinks.
I admit this scenario depends on most general financial advisers disappearing but it is the FSA which is threatening to increase exams and capital adequacy requirements and perhaps abolish the category. So this situation is based partly on what the FSA is planning.
Of course, the argument might run that an IFA business will not pull down the shutters overnight and put up a big sign pointing to the nearest Halifax or HSBC, with the message “Try your luck there” pinned on the door.
Perhaps the FSA will argue it will not happen this way in practice. But this is from an adviser I spoke to this week. He suggested that he was on the way to moving model and was just about there but had no chance of getting the exams in the timeframe suggested. His business that he thought he could sell when he retired was looking decidedly less valuable.
He could not envisage selling to a primary outfit. They could not, in his view, advise his clients. His exit would be to sell to a PFP or chartered practice. But he said they would knock down the price, given that there would be hundreds in the same boat. And what would they do with his clients? Charge fees? In the past, he would have sold to a similar adviser but there would not be any similar advisers.
For the adviser, the result looks like bad news. For his clients, they may have nowhere to go or may have to go somewhere they do not want to do.
Finally, in this RDR discussion, we have found some consumer detriment. It is called an advice black hole. It is what happens when you put IFAs out of business and come up with a replacement not fit for purpose. Let us hope the FSA stops talking such nonsense and faces up to the real implications of what it is doing.