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Fight to keep consumer choice

Ten years ago, I was one of a group of parents involved in a battle to save our local primary school from closure by the education authority.

The procedure involved an announcement by the LEA that changes were being considered, including potential closure. This progressed into a consultation. We parents naively believed logic would sway the authority into rejecting the closure but it quickly became obvious that the consultation was a ruse designed to flag the idea well in advance and soften the blow when the county council eventually ratified the closure plan.

The parents formed an action group which devoted effort to uncovering the truth behind the LEA’s proposal. The closure was ostensibly a financial decision but we destroyed that argument by calculating that the supposed £42,000 annual saving was actually only £16,000, from which had to come the cost of transporting children to alternative schools. In short, there was no saving.

These memories were reignited by the latest RDR publication. Back in 2007, ideas and suggestions were floated which were “consulted” on. After three years of discussion, argument and recrimination, we find that the vision of Callum McCarthy is alive and well, having been nurtured into a plan.

The FSA continues to be fixated on the commission = bias myth, a fiction refuted by its own research and acknowledged recently by Sheila Nicholl in her speech to the Association of Luxemburg Funds Industry. She told the conference “We are very concerned that commission bias, actual or perceived, affects the advice.”

As if the financial services industry does not have enough problems with real issues, we have a regulator intent on solving imaginary problems. Would it not be better and vastly cheaper to alter consumer perception rather than fix something that is non-existent?

The pro-RDR brigade will hiss and boo at such logic.

Interesting then that such a celebrated commentator as Martin Lewis at MoneySaving Expert believes removal of commission will diminish the availability of independent advice for the typical consumer. Even the Financial Services Consumer Panel has stated: “Financial advice will be less-widely available post-RDR”.

Like the local education authority, the FSA are deaf to reason and obsessed by the illusion that product transparency will transform the industry and bridge those devilish pension and savings gaps.

Many of the anguished primary school parents projected the same forlorn expressions as the advisers I meet with. Fortunately, a number of the parents did not cave in to the will of the local education regulator. They sought support from sympathetic MPs and after discussions with Charles Clarke, MP, the education minister, he overturned the decision of the local authority – the first such occurrence in many years.

Those who believe the FSA does not know best, that its antics will result in an industry in decline as well as financial depredation for millions of consumers, must join forces to highlight the many instances of illogic to the incoming Government.

Consider the viewpoint recently received from Henry Bellingham, MP, the Shadow Minister for Justice. He told me: “The more choice consumers are given the better, so I would be instinctively in favour of them being offered either a choice of paying by fees and commission or a mix of the two.”

Alan Lakey is director of Adviser Alliance and partner at Highclere Financial Services

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. Alan, as ever, makes an articulate and reasoned argument.

    He is wrong though to suggest that the pro RDR brigade ( and whilst I object to the pejorative term “brigade”I find myself one of them) will hiss and boo, that is not correct.

    They will simply argue that actually “adviser charging” where the cost of advice comes from the product in the same way as commission (except that the former requires proper engagement with the client whereas the latter is an amount that is typically determined by the product provider) is sufficent choice for the consumer. They will also continue to emphasise that adviser charging is not charging fees, it never has been and never will be.

    Are we really arguing that because the consumer knows that they are paying for the cost of advice that they will not buy that advice? Or is this an indication that commission is described to the client as a “no cost” to them way of obtaining this advice? If that is true then the FSA has its case proved for them.

    Alan selects this line “We are very concerned that commission bias, actual or perceived, affects the advice.” to support his argument but I read it as support for the contrary argument. Whether actual or perceived it has the potential for bias and we all have plenty of anecdotal evidence of such bias even if it is not mainly the problem of the IFA sector

    The potential attrition rate of the IFA community and the suggestion that this will mean less available advice to the consumer may well turn out in practice to be wholly inaccurate.

  2. Nick Bamford needs to see the things I have seen over the last few years, yes there have been individuals who have shown commission bias but I have also seen fee bias. The problem is income for the adviser and whether it be commission or fees as a percentage of the investment agreed between the adviser, the client and, in the case of commission, the provider there is a risk of bias, it is futile to attempt to deny this is a problem.

    The RDR misses its target.

    More on this again some time.

  3. I believe that both Alan and Nick are making valid and reasoned cases for their stance on RDR. I can see no difficulties post 2012 as mat IFAs will easily adapt their business model to CAR. We may even arrive at a point where adviser charges are taken from National Savings products.

    There will however be some detrimental consequences. The less well off will undoubtedly avoid taking advice because they perceive it as cost, whereas presently cost of advice is not seen as a barrier to seeking it. For IFAs this should weed out the time wasters and the small cases, but for the public at large it will be a closed door.

    It is inevitable that the number of advisers will reduce. Great news for those that are left but not so good for the public at large. Nicks argument will always be that better qualified advisers are should be the ideal to aim for. However a huge amount of empirical knowledge will be lost to the industry over the next few years as experienced advisers decide they have had enough.

    The FSA foisted their requrements on the adviser market without taking a blind bit of notice of the feedback in the Consultation Papers. They bulldozered it through citing bias and consumer detriment even though their own research found none.

    Whether you find yourself siding with Alan or Nick in this matter one thing is clear to me. The result of the post 2012 changes will be widespread consumer detriment.

  4. I cannot get excited about adviser charging. You can do it already and it’s one of the better proposals in the RDR. No-one can justify receiving different commission levels for the same product from different providers and that will inevitably cause bias.

    The reason why financial advice will become scarcer after the RDR is the number of advisers who refuse to take the additional exams. They have decided (rightly in my opinion) that until the FSA starts to regulate fairly, this is a business with a very limited future.

  5. Why dont we meet half way. Financial Planners achieve QCA Level 4 status and the FSA allows us to continue receiving commission (repackaged as Consumer Agreed Remuneration). Personally whenever I recommend a product I look whether it meets my clients requirements, has flexibility and is competively charged. Simples.

  6. Evan I have seen much evidence of bias regardless of remuneration method and not for one moment am I saying that the RDR is perfect but… given the choice I would much rather decide the level or remuneration with my client and without interference from the product provider because I believe that is what enhances my independence as a business and as an adviser.

    Tony Scott makes a very valid point that Adviser Charging (what was going to be called CAR) is nothing to get excited about because it is not new at all. We have been using it for the last six years and based on experience it works.

    The abolition of commission is not the issue for IFA longevity but resistance to change might well be

  7. Incompetent Regulators Awards Team 15th April 2010 at 6:13 pm

    To the adviser charging brigade. You are a minority in this argument commissions versus fees. Consumers should be given choices and we should not be shoehorned into ‘one size fits all’. I have 30 year experience and I am sick and tired of being told by people who don’t know.

    Just in case you forgot Mr Bamford let me remind you about distribution for the wider audiance and not just for your piddly little business and for people who keep selling this fee mantra. Pre 1997 we had the best privately funded pensions shemes in the world and more money in private pension schemes than the whole of Europe. We then had commissions, then remember? If it’s not broke why fix it?

    The public won’t save unless you give them reasons but Labour took those way. And we need the distribution channel to be rewarded whichever way they see fit, let the market decide. Once you break this link then there is no saving. And now here we have it right under Labour, no one in long term savings.

    We have a decimated long terms and private pension sector. With over 90% of final salary schemes insolvent whilst the government denies the the public sector pension is a real problem. This even dwarfs the bank bail out!!!!

    The problem with some people within our industry they are short sighted and can only view things form their own perspective and not in the wider capacity in what needs to be achieved. And that is to get people to save and take personal responsibility.

  8. L.D Wigglesworth F.C.C.A, IAC., Cert PFS 16th April 2010 at 2:51 pm

    I have just replied to an email re
    Friends prov
    Avavia questioned all their clients who REFUSE to pay fees

    WHY because the FSA has just contacted HMRC re VAT on fees for IFAs ( FI ADVr 8/4/10 page 18 )

    I try to save my client tax when ever I can
    so you all want to dump 17.5 % VAT
    tax on your clients …. where is TCF

    Well you can reduce your tutn over below the
    Vat threshold and go out of business

    …do you … think perhaps there is another hidden agenda here

    For God sake WISE UP dummies !!!

    I rebate commission and always have

  9. The only correct word in “Incompetent Regulators Award Team” is the first word. It seems this blogger is so incompetent that he hasn’t even read the RDR papers or understood them.

    So for the sake of the hard of understanding Adviser Charging is not Fees!! The consumer still has the choice to pay from the product just as they do in the case of commission. The difference is that the consumer and the adviser agree the amount without interference from the product provider.

    Come on Incompetent Regulators Award Team be brave and tell us your name!!

    Regards Nick Bamford Chief Executive “piddly little IFA Ltd”

  10. Adviser charging is quite workable for single premium business, although for smaller sums it is likely to involve higher fees than the current typical ISA commission of 3%.

    The real problem is with regular premium business. This type of business has fallen dramatically since 1998 due to Stakeholder and RU64.

    It just might be workable id clients regularly shelled out £500 p.m. into ISA. and pensions but they don’t.

    A client starting out on £50 p.m. cannot realistically be charged the £600 cost of dealing with the case.

    Yet there is more to it than this. We know that clients are not and never have been queuing at our doors to take out such plans. In the main advisers dealing with the low net worth sector have had to prospect for them. The nature of prospecting is to entice somebody to make a sensible decision yet the discussion that must take place regarding adviser charging is an obtacle if only because it introduces a negative into the discussion.

    We also know that many clients do not value the service that IFAs offer and bizarrely believe that banks offer a lower cost or better value service. The RDR does nothing to minimise this view.

  11. Incompetent Regulators Awards Team 19th April 2010 at 5:20 pm

    Dear Mr Bamford

    You are confirming my exact point, you don’t understand the benefits of commissions. I didn’t mention CAR, and just in case you think I am a commission grabbing IFA, most of my business has been using CAR for the last 3 years. But I am not short sighted not to be able to see what the likes of what Alan Lakey is pointing out regarding smaller regular premium business. That’s why pro RDR IFAs are small minded and cannot see the bigger picture. Some people just think of themselves!

    Just keep guesing who I am?

  12. My definition of small-minded is someone who is so uncertain of their own opinions that they hide behind anonymity when blogging about the subject. I can assure you that we certainly won’t be wasting any of our time trying to guess who you are.

    You are anonymous now, and I suspect you will be post-RDR.

    You are right however, I don’t understand the benefits to clients of commission. I can perfectly see the benefit to the adviser and the product provider.

    Alan seems to be saying that when 3% is commission on small single premium business, that is OK, but when the 3% is adviser charging, it is too low. That doesn’t make any sense.

  13. Incompetent Regulators Awards Team 20th April 2010 at 11:04 am

    Oh OK Mr Chief Executive Bamford ( nice fancy name). No let’s pretend you know what you are talking about are you are desiging the RDR. How do we get the wider audiance in the UK who want to save £50 to £250 per month into save in long term plans like pensions whilst giving them some choice?

  14. Nick, what I meant, and probably explained badly, is that certain types of business are not profitable – such as £3,000 SP into a unit trust or £50 p.m. into a SH pension.

    The RDR will not make them any more profitable but the fact that some kind of adviser charging is in force will not be attractive to ‘small’ clients.

    The RDR does nothing to bridge the various savings/pension gaps yet this was originally one of the proposed outcomes.

    Like a disabled, flatulent wildebeest the RDR is a horse designed by the FSA committee.

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