Clearly, the new regime offers enormous opportunities to change the way IFAs operate. For some, this will simply be formalising changes they have been moving towards for some time, for others, it will mean a radical restructure of their businesses.
It is clear that the FSA is keen to ensure the RDR is not just a change to the pieces of paper an adviser puts in front of the client as, frankly, has been the case with some regulatory reviews in the past. There is an obvious determination to ensure that commission cannot be reinvented via the back door.
In approaching the whole review, there has been a refreshing willingness to recognise the risks of unintended consequences and to avoid such pitfalls.
I see the vast majority of what is contained within the RDR as positive but the contents of the penultimate paragraph on page 37 of discussion paper 08/6, under section 4.30, however, identify areas where I believe the regulator needs to be particularly careful not to undermine much of what they are achieving.
This section deals with the charging structures that would apply for dealing with different providers and different types of product.
I have become even more concerned about this point since Dan Waters’ recent speech to the Association of British Insurers. In this, he stated “a life assurance bond, an investment trust or a collective investment scheme might all be potentially suitable, at the end of financial review, and adviser firms should not face incentives to recommend one type over another” and also “whether a financial plan culminates in a recommendation for a consumer to buy a product from Company A or Company B should not affect how much the adviser firm charges for that financial plan”.
Essentially, the FSA are saying they would not expect to see charges varying significantly depending on the type of provider or the product recommended.
In theory, I can follow this logic but in practice I believe it is really important to recognise that some products are far more complicated than others and there can be a world of difference between the levels of service provided by different financial institutions.
It has been clear to me for some time that most of the bigger advice firms are planning significant changes and are keen to embrace new ways of working which will build the sustainability of their businesses.
Almost invariably, improving efficiency is a crucial element of these changes. Over the last few years, the majority of larger firms have been making enormous investment into technology. They have been putting this at the heart of their businesses in order to drive out unnecessary costs. By making such investments, they are putting themselves in a position where they can interact far more cost- effectively with product providers which have themselves made similar investment in technology.
Sadly, not all financial institutions, either life companies or fund management groups, have given the same priority to enabling a more efficient service. Over the past 18 months, I have come across a number of organisations, especially, but not exclusively, fund management groups, which seem to be relying upon the FSA requirement for advisers to deal with the whole market in order to maintain independent status, as an excuse for failing to invest in better service.
Their logic is along the lines of, it does not matter if we do not invest in technology to improve the service we give you, the FSA say you have to deal with us if you want to be independent.
Many of the new advice propositions that firms have outlined to me over the last year or so are predicated on being able to pass on to consumers savings which advisers can achieve by dealing with more efficient providers.
Conversely, where a client has investments with companies that are inefficient, relying on phone calls and faxes or even postal communications, it is not fair that the increased costs of servicing such contracts be passed on to other clients whose investments are solely with efficient providers.
This would inevitably lead to multi-tier charging where the amount paid by the client for establishing and maintaining contracts varies relative to the cost the adviser incurs, which in turn would be defined by differing levels of provider service.
Equally, charges would vary depending on the complexity of the investments that need to be examined as part of an advice process.
There is evidence that firms are not waiting until the final deadlines but are already building propositions designed to embrace the new principles the regulator is advocating. Hopefully, this is an approach the FSA would welcome.
Only last week, I was speak-ing to a major advice firm which will be retraining hundreds of advisers from the middle of the year to operate with a completely different RDR-friendly advice process.
To impose restrictions on adviser charges that prohibited them from recognising the savings achieved by dealing with efficient investment providers, or could not reflect the different levels of work needed to advise on products of complexity, could restrict innovation and undermine much of the excellent work in the RDR.
It would be tragic if inefficient providers of any type were allowed to use the review as a shield for poor service.
As Waters gave an update at the ABI conference, perhaps another speech could further clarify this point before the next stage of the consultation in June.