Adviser-charging will soon be here to stay and retail investors are already being asked to pay fees rather than a commission on those RDR-ready products that have been released ahead of the review.
Advisers and providers are adopting a range of approaches, from cash payment to de-ducting the charge from the product, many of which have been costly to implement but show how the market is likely to pan out after the RDR.
Providers yet to decide what model they will use risk a backlash from advisers seemingly reluctant to deal with providers that do not offer an advice charge-handling facility. Firms must also consider how their solutions appear to the end customer, who could easily be put off by an overly complex advice-charging solution, even if it offers potential tax benefits.
A cash payment appears at first glance to be the simplest and most transparent solution, as the transaction to cover the cost of advice is a straightforward cash payment from customer to adviser.
This permits the adviser independent control of charging without relying on a provider for support. However, it involves not only investment from advisers and providers in infrastructure to develop the capability but, for some products, potentially deprives customers of tax advantages.
The alternative to a cash payment is to apply the charge to the product that, in the case of pensions, delivers a tax relief and investment return benefit to the customer. The adviser benefits from the cost of handling the advice charge being carried by the provider and from not requiring the customer to hand over a cheque for the advice.
Although potentially more difficult to communicate to the customer, the benefits potentially outweigh the complexity, provided it is disclosed at the point of sale.
However, complications abound as the potential methods of deduction – whether via the annual management charge, unit cancellation or an allocation – and the contractual arrange-ments between the customer, IFA and provider are likely to be untested with the FSA and HM Revenue & Customs.
In some cases, VAT or product taxation implications may be unclear and some solutions may increase the customer’s responsibility to monitor their own tax liability where advice charges could trigger chargeable events or breach contribution limits.
There is currently no con-sensus on the right way to implement a solution to adviser-charging – and to a degree it is a question of commercial judgement – but it is increasingly evident that a common model would benefit the consumer, industry and the regulator.
Advisers and providers must work together to develop a common language for the benefit of the market. Multiple approaches to advisercharging risk confusing consumers and eroding their trust in financial advice. In the worst case, there would be the potential risk of misselling and regulatory intervention – the very outcomes the RDR was designed to avoid.
Mike Eaton is head of RDR at KPMG UK