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Could RDR actually create more bad advice?

Could the most radical change in regulation for decades, brought in to improve the quality of advice, actually back fire and cause more headaches?

I started getting concerned about this when I was talking to a group of IFAs about delivering ongoing value in order to ensure that a regular income could be assumed. There were some first-class ideas with a strong focus on delivering exceptional value. But then there was another train of thought, that went in a very different direction indeed.

One IFA, who represented a large group, maintained that their view was to carry out regular quarterly fund switching as the golden ticket for ongoing fees. Now don’t think I mean rebalancing by this, I mean that they are fully intending to switch their clients’ entire investment sum out of funds which may be performing more than satisfactorily and then reinvest in alternative funds, just for the sake of it. This is not being planned with a defined investment process in mind, but instead the sole goal was to secure the ongoing fees and demonstrate “value”.

Now fund switches, if you strip out all the charges and done on the right basis, can help to ramp up performance. However, as we know, fund switches done too frequently and for no investment reason, can turn a sound approach into a much reduced asset value and an unhappy client.

What a shame it would be if this happened, but unless clients don’t just focus on what they will get for added value but what impact that would have on their finances, then it could be a disaster waiting to happen.

Philippa Gee is managing director of Philippa Gee Wealth Management.


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There are 15 comments at the moment, we would love to hear your opinion too.

  1. Soren Lorenson 15th May 2012 at 11:00 am

    I think your wrong. Anything done on fees is automatically good advice and anything done on commission is bad, done purely for the benefit of the adviser.

    If you want proof you only have to look at the Australian study the FSA used to back up the entire RDR.

  2. Mmm…so fee-0based are switching to maintain fees.

    Commission-based are selling any old junk.

    Mortgage enders are declining more than they’re accepting.

    FSA is jumping ship before the impact

    Hoban is averting his eyes and hoping for the best.

    Dubai is about to be regulated by theorists.

    Looking good, isn’t it?

  3. Yes of course it could, obvious really. Every regulatory initiative has had the opposite effect to what was intended.

  4. Surely the problem in that example is not RDR…just an IFA firm thinking in a very muddled way. All readers here would be thinking “why would they do that just to justify their charges?” so it sounds like a bad apple. It doesn’t prove either way if the system is right or wrong.

  5. This woman thinks she is a financial journalist and she is only getting around to realising this now? This has been on the cards since the day and hour the FSA said you have to actually do something to earn on going payment. I have said it all along and at the risk or repeating myself – Trail never was nor will it ever be for onging service. It was & is a simple way to defer taking large initial commission that was able to generate recurring income. All the plonkers who tried to justify to all n sundry that it was a way of getting paid for onging service have dropped us all in it. I spent 15 years in direct sales force who paid 3% initial only on investments – no trail. Our incentive to earn more over the yers was by service. We got renewal commission on term etc, Pensions and Whole of life. That model worked very well until the regulators kicked in with compliance, T & C etc and then direct sales forces closed as it was unprofitable but not before tryingto come with ways to make money by much more risky investments which went pear shaped. I am convinced if our industry had been left alone we would still have mostly simple products that everyone understood and we would not be in the awful prediciment we are in currently. Please dont come back at me saying “oh yeah? what about endowment & pension misselling”. My view was is and always will be that 95%+ of these werent missold. They were miss documented (or not enogh papers in the client file to show suitability) + we all have clients with selective memories. They can tell you exactly what we said 6 years ago at a meeting (almost verbatum) but cant remember the main points of the policy from the KFD. I have digressed. Long and short is that were are all up the swanny rivver post RDR

  6. Come on Marty, time to get over yourself. RDR is effectively already here, so you might as well operate your business in an RDR manner from today, it’s not such a big change in practice.

  7. RDR in itself will not change much, it certainly will not change attitudes of the grab and run boys (and girls ).
    The only difference will be that there will be a great deal fewer advisers and the bad thing is that some of the best and most honest will have gone leaving a free run for some of the sharks.

  8. Soren Lorenson 15th May 2012 at 3:48 pm

    You think RDR is already here – just wait. It’s not all about fee charging; it’s about the consequences of fee charging.

    Elsewhere on MM today there is an article about F&C launching a direct offering with the view that people with £100K or less will just go direct. Unless you are selling real advice (in reality most IFA’s don’t and most client don’t need advice – they just need a guided sale) you are toast.

  9. @IFA 2.43. I am 90% of the way there but that wasnt my point. There are still going to be poor IFA’s gettig fined for unsuitable advice based on evidence in the files. RDR is not going to get rid of that. The only good thing thing that will come out of it in theory is that we are better qualified. The rest of it is simply a very expensive way to doing the same job for clients that we have always done and it was & is a very pointless exercise that clients are going to have to pay for.

  10. There are a whole lot more danger areas than just gratuitous fund switching. I speak to advisory firms that are about to undertake work they have little or no competence in to try to make ends meet. Then there is the mother of all churns going on in the corporate pension market prior to commission abolition. The list just goes on and on.

    No wonder all the senior management of the FSA have taken to the lifeboats. Frankly, I predict a riot.

  11. man on the moon 16th May 2012 at 3:57 pm

    There was me getting the road to the Office re tarmacced and the picket fences painted fresh white for all of those eager prospective clients who are ‘needing’ my services.

    What with the RDR paving the way for the mass affluent to need my and our services because fewer advisors will exist post RDR.

    Nah – just a bad dream.

  12. This article proves only 2 things we already all know. There are a small hardcore of IFA’s out there who don’t want to put customers at the heart of the business, further supporting the view of some your all just sales people at heart, in this case bent as a nine Bob note.

    Secondly journalists are generally without a ethics….well I don’t see the bit that says she immediately whistleblew to the FSA her concern over this model do you…

    God awful!

  13. When I joined my new network in June Last year, one of the comments I made, which has only just come to light in a conversation with one of the directors recently, is that I said, this job is all about doing the best thing for the clients, I still believe that, whether you charge a fee of 3% on funds invested with 0.5% ongoing annual servicing fee or take 3% commission with 0.5% renewal/trail, makes no real difference to the outcome, the advice to the client to invest in any particular product or fund has to be based on their need, an attitude of prudence, (Man on the Clapham Ombnibus attitude) product research and affordability, with clients properly documented Attitude to Risk, correctly assessed.

    If we are to believe the figures on adviser numbers declining, there will in theory be more consumers for those of us determined to do our best for clients, the difficulty I see is how do you prove you add value, when in fact it could take up to 5 yrs to prove the course of action / product / fund you advised the clients to invest in, demonstrates its worth to them.?

    If anyone thinks this job is about THEIR business, they are on a hiding to nothing, it is about the consumer of our advice and investors in products, whether they be insrance

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