Fidelity’s Peter Hicks is adamant that if something is wrong, he will say it is wrong. He believes there are things in the retail distribution review that are not just wrong but are potentially disastrous.
“One example is the notion of what is independent in the RDR. Every single piece of consumer research, every survey that anyone has ever done shows that if the consumer understands anything about financial services, it is that independent means the ability to choose from across the board.
“If you say that is not the case any more, I cannot see how that helps the consumer. I do not see how that clarifies things for them. There is more danger of them dealing with someone who they think is independent but who is not. It dilutes the status of independence,” he says.
The head of Fidelity’s IFA channel believes that the platform paper is very well written and shows that the regulator has grasped what supermarkets and platforms are about. However, he says the RDR paper is an amalgamation of views, was badly put together and should have been much shorter.
He says its stated aims are laudable but he believes it clouds many important issues and should have been more explicit about what changes it wants and why.
Hicks says: “The concept of general advisers not being able to call themselves independent despite the fact they are choosing from the whole of the market is potentially disastrous.
“If you wanted to say in the paper that fees are good, commission is bad, it would have been an interesting debating point but the paper does not go so far as saying that. It half says fees are good, commission is bad. It says we are going to have this thing called customer agreed numeration which works exactly as a commission but we will let you call it a fee.”
However, Hicks says he supports the FSA’s moves to separate the cost of the product from advice. “I think it is very good to separate the cost of the product from the cost of advice but there is no reason why commission with disclosure should not do that and there is no reason to remove the independent label from somebody who still wants to charge mostly through commission,” he says.
Hicks believes the RDR paper is potentially more constructive about primary advice but questions some of the criteria around what makes something simple.
He says: “Advice for the masses is a good idea but two of the things they said probably would not apply would be the price of the product and the risk of the product. There is nothing to say consumers are getting a fair price.”
On the decision not to consider risk, he says one example the paper used was an index tracker. He says: “You do not have to be a hedge fund to lose money. An equity index tracker can lose you money as well.
“The recent history of the industry is littered with things that would qualify under the phrase in this particular paragraph about a product with outcomes and risks that are simple to understand but the product itself could be really complicated. The guaranteed equity bond might meet that to a T but then so did precipice bonds, so did with-profits bonds and so did endowments. If you want to provide advice to the masses and make it more accessible, let us think of some better ways to do that.”
He is also scathing about the idea of toned down suitability. “You cannot say it is suitable if a primary adviser only looks at a few things, when you are also saying if you went to what would now be called an independent fee-based financial advisor you could find something more suitable.
“It is either suitable or not. It is like confidential. You cannot be half confidential. You cannot be half pregnant. Something is either suitable or it is not. It cannot be half suitable or suitable in some kind of reduced or diluted way.”
Hicks believes that customer agreed remuneration may not change some of the high commission practices prevalent in the market. He says: “If you want to say this qualifies as a fee, the concept of non-matching CAR, gosh, you would potentially have an adviser taking 7 per cent up-front commission on an investment bond and the customer just pays that back. It gets clawed back from the customer through added product charges over a period of years with the no exit period aligned to that as well. The customer finds they are hooked into something very expensive and it looks not very dissimilar to what people do with investment bond commission today. So you cannot say fees are good, commission is bad and then start introducing this sort of concept. It is irreconcilable.”
Hicks says it is a shame the FSA has taken such a pessimistic view of the industry, as demonstrated particularly by Sir Callum McCarthy’s speech at Gleneagles. “It makes it look like a terrible industry which needs cleaning up,” he says.
He believes the industry has changed massively and has already gone some way to professionalising itself. He says the failure of more advisers to move to recurring revenues has also been misunderstood.
“Most advisers I talk to understand that their business is going to be better and more valuable in the long run if they move to recurring revenues rather than taking big initial commission. If they have not made that move yet it is often because they cannot financially. They are stuck in rut that they have been put into over the years by providers continually competing with one another to pay ever increasing commission rates.
“If they have got themselves in that position, that is a shame. Those guys have not failed to move to a recurring revenue model because there has not been a paper or retail distribution review yet, they have failed because there is such a big step change in their financial model and they cannot move.”
He agrees with the views expressed by 600 advisers in a survey that IFAs, or general advisers as they will be called, will get squeezed between fee-charging advisers and primary advisers, even if GFA is a permanent category. He says: “If the regulator does not do for them, I think the market will.”
Hicks says advisers in the middle might lose the independent tag but face competition from advisers selling limited products with salary and bonus structures that allow them to call themselves independent under Caris. He says the RDR clearly suits those “weapons of mass distribution” – the banks.
He says: “There is nothing wrong with banks being big winners. They can be incredibly useful in terms of getting advice to the masses. And there is nothing wrong with Nick Cann and his Institute of Financial Planning members doing really well with their high-net-worth clients. They do a great job.
“What really gets me is that if you have got 44 per cent of non-fee advisers surveyed saying they are going to lose out, if you extrapolated across the market, think of the intellectual capital, the experience and the expertise that is going out of the industry to get substituted by something called primary advice using this concept of a reduced meaning of suitability. It belittles that experience and expertise.”
He also defends advisers against many of the accusations of churning. “There was a great story where the IFA had taken advantage of extra high allocation rates and commission. It looked to me that he had done a fantastic job for the client but it was described as churning. That is what happens when you get this commission-based competition going to excess. The regulator could say if you will not stop it, we are going to, but actually the providers could have stopped it all along.”
From a personal point of view, he would bring back the maximum commission agreement and would have any commission come from the product. If it was 3 per cent, then the product would start with 97 per cent invested which would remove confusion.
Fidelity is planning to put in a final response to the paper in October and is also working with the Investment Management Association in formulating a response.
Hicks’s advice to advisers is to read the RDR paper and respond to it, back organisations such as Aifa and work through the various networks and support services groups. He hopes the FSA will receive thousands of responses and believes the fact that it is a discussion paper may mean it changes. He says it also helps that there are good intentions behind the paper.
But if the reforms go through unchanged, does he feel it could damage Fidelity? “As a fund manager and fund supermarket that deals through lots of different distribution channels, no doubt there are some areas which would make it difficult for us and in some areas we would be big winners.
“One thing is for sure, if the CAR does come in, it would accelerate the move to platforms. That is possibly at the expense of fund companies but we would still get the assets.”