As we creep past the first 100 days of the RDR, it is time to consider those challenges brought about by the RDR that remain outstanding and unresolved for independent and restricted advisers.
Many of the challenges still revolve around securing the cash flow and profitability of the business. We all knew (or should have known) that the transition to adviser charging was not going to be a simple matter of ‘relabeling’ commission to fees, but despite the warnings many advisers have not paid enough attention to the transitioning of this aspect of their business in advance of 31 December.
Probably the biggest challenge still facing firms is in respect of trail commission on investment and pension business. The stance being taken by some providers to switch off trail where the receiving adviser is not able to produce a client declaration of ongoing service will, without doubt, see them fall from favour for new business in the coming months and years. Some firms have spent a lifetime building up a residual value in their businesses and this is now being completely undermined without good reason by some providers.
Trail has always been part of the point of sale commission disclosure. The right to the trail never included any agreement or undertaking to provide an ongoing service. It was always considered at point of sale as being ”commission earned but not yet paid” for introducing the client to the provider and for securing the investment or pension contract.
When we look at the challenge of moving to an adviser charging regime, it is not helped by the fact that some providers do not appear to be up to speed in many respects. One of the key areas has been in the Electronic Data Information feeds that most major firms use to reconcile their fees and commissions. Product providers are informing advisers they have adopted the Origo Standards that are intended to ensure consistency of terminology. Firms need to know if the money being received from providers is in relation to legacy commission, initial adviser charge, ongoing adviser charge or ad hoc fees as this is required for their FCA remuneration reporting. This is sadly not happening and the lack of consistency in the terminology being used by providers is having a serious impact upon the time and resources firms have to employ to decipher the information.
A further challenge presented by some providers is they appear to be profiteering (be it intentional or not) at the expense of the client when the adviser has recommended a change to an existing product that causes the switching off of trail commission. The trail commission is switched off but the provider does not reduce their annual management charge from which the trail commission was being paid. If the adviser then agrees with the client that an ongoing adviser charge should be established, the cost to the client has increased by the amount of the ongoing adviser charge. Explaining this to the client is not an easy discussion to have and would not be needed if the provider made an adjustment to their AMC.
The challenge of VAT is one that was unforeseen until much later in the day. However it is a worry that 100+ days into the new remuneration world firms are possibly still not facing up to this challenge. Firms holding on to the simple rationale that because they have never been VAT registered in the past means they do not need to be VAT registered now, could be storing up a disaster for their businesses at some point in the future. Advisers must check their VAT position and seek professional opinion.
Gordon McNeill is joint deputy chief executive of the On-Line Partnership