The four-year-old retail distribution review project started with the needs of the consumer at its core but is in danger of becoming one of the most dogma-driven anti-consumer pieces of legislation ever.
I can only believe that it has been driven off course by vested interests and unless we return to the basics, we will end up with unworkable nonsense that makes advice non-accessible to the public it is supposed to serve.
My firm of independent advisers has been trading for 15 years and has received so few complaints that you can count them on the fingers of one hand, and none in nearly a decade. Yet we spend around 50 per cent of turnover on administration and compliance, which is ultimately paid for by the clients.
Surely a review that is genuinely client-focused should be trying to drive down costs for the consumer and would seek to reduce paperwork for sectors of the market such as ours and concentrate on those failing the consumer?
The overall objective of the RDR is for the benefit of the consumer, increasing confidence and trust. To achieve this, there are three broad aims:
to raise professional standards;
- create greater transparency; and
- abolish the myth of free advice.
I do not think anyone has a problem with the wider objective or the aims. However, we are currently in the process of implementing solutions that will lead to higher taxes, higher charges and reduce freedom of choice, all of which is detrimental to the key objective and this is why the RDR needs to go back to basics
I have no issue with the insistence on greater qualifications but I believe some level of individual dispensation should be considered for existing practitioners where they have worked for 10 years or more as an adviser and can demonstrate a low complaint record.
If this took the form of extending the examination deadline to 2020, it would take the heat out of the situation and allow those in their mid-50s time to retire.
In terms of greater transparency, the aim is fair enough but the implementation so far would appear to be anti-consumer. Products have been simplified but, far from being a driver to lower costs, the RDR has been used to increase them.
If one takes a product pre-factory gate with commission of X and then looks at the post-factory gate product with the consumer-agreed remuneration remaining as X, the reduction in yield is invariably higher.
I can only believe that the RDR has been driven off course by vested interestsand unless we return to the basics we will end up with unworkable nonsense that makes advice nonaccessible to the very public it is supposed to serve
Product providers are essentially reintroducing bid/offer spread through the back door.
One can not help but feel the consumer is being set up. By separating out the advice portion of IFA business, the structure will be in place for a widespread imposition of VAT. It is hard enough to encourage consumers to save and protect themselves in the first place, so how anyone thinks that adding VAT will help is beyond me.
Abolishing the myth of free advice is the area that has been most driven by dogma.
In 15 years, I have not had one complaint about our remuneration and I do not believe that any of my clients believe I work for nothing or is so illiterate that they can not read the disclosure documents supplied.
Like many advisers, we have operated a fee or system of commission in lieu of fees for many years. Clients in the main prefer paying commission because it makes things simple and is more affordable. A few simple examples readily illustrate show this:
- A client with a £200,000 pension drawdown account is paying a 0.5 per cent annual fee via the fund, that is £1,000 a year. If the client is collecting £12,000 income and pays the fee separately, his income drops by 8.3 per cent.
- A client invests £100,000 on a commission basis. When he looks at the value in five years time, it reflects his position net of all costs. Also, £100,000 is the starting point for his capital gains tax calculation.
Via the separate fee route, the starting point for CGT would be, say, £97,000 and to ascertain the actual performance of the investment he would have to separately account for the cost of any ongoing advice.
- A client paying into a pension and letting the pension policy pay the customer-agreed remuneration means that tax relief is given to the advice fee. Pay the fee separately and no tax relief is given.
- A client taking a 5 per cent withdrawal from a capital investment bond with advice paid via trail receives the full 5 per cent. If the client pays for the advice separately at, say, 0.5 per cent of the fund, his income drops 10 per cent.
If the regulator genuinely wants to remove commission bias then all investment contracts should be priced on a factory-gate basis. All contracts should allow customer-agreed remuneration to be paid via the provider.
If the provider chooses not to allow this option and it is a client requirement, it should be understood that this is not commission bias driven by the adviser but the failure of a product provider to satisfy the needs of a client.
Existing products ideally should to be able to add and remove advice fees to existing products such that policies do not need to be cancelled to meet the client’s objectives regarding advice.
The industry has to accept that the current situation regarding the mass marketing of pensions has failed the consumer. The regulator is right to go for low-cost auto-enrolment products and there is little scope for trail commission and ongoing advice in this market for younger lives.
Where advisers have a role to play is for the well heeled, those with large lump sums approaching retirement and those needing to amalgamate their nest products .
If the RDR is to really work in practice, it needs to be split three ways.
First, product providers must be responsible for their products and risk grading them accurately. The product needs to be in plain English and do what it says on the tin.
If the adviser then matches the client to the product on the back of the product provider’s risk rating and product description, the adviser should be deemed compliant as long as the matching process itself was satisfactory.
It should never again be acceptable that guarantees fail on products and the advice sector be held responsible. Similarly, it was shameful that split-capital investment trusts could be described by the product provider as “a one-year-old that lets you sleep at night” and then the advisers held responsible when the products revealed design faults.
Second, the tied sector should be separately regulated and, third, the independent sector should be separately regulated.
Within the tied and independent sectors, different rules should apply to the various sectors of loans, protection, regular premiums and lumpsum investment.
The regulator has to fully embrace that protection needs to be sold and that the raison d’être for an IFA is to give advice. An investment product is simply a conduit to access fund management and provides the tax structure.
If a main objective of the client is to obtain advice on an ongoing basis paid for via their products and the existing products do not facilitate this, then the products are not suitable.
A regulator that is so blinded by dogma that it can not understand this has little hope of completing the RDR in a manner that will be embraced by the public. It shows it has misunderstood what the client wants from an adviser.
The RDR is still more than two years away and we have not yet seen its final form. Dogma has no place in this review and, as an industry, we owe it to the consumer to get it right.
Advisers qualified to more professional standards, transparency within contracts, accountability of product providers for the products they design and market, transparency of costs and transparency of remuneration will all improve consumer confidence and this review has the ability to deliver.
Integral to the success of the RDR is that vested interests, whether they are within the Treasury or the industry, must not be able to use this as an excuse to increase tax and charges or introduce measures that restrict consumer choice.