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Industry needs a standard adviser-charging model

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


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

  1. Sounds good the FSA would like us all to charge the same- as little as possible – whilst continuing to pay all the costs being regulated incurs.
    The RDR is costing millions, yet the fsa expects the price of giving advice to come down.
    The only people who will be able to afford advice after rdr will be the likes of those from the Big 4 who are on eye watering salaries due to the fact that they can charge the fsa astronomical amounts of other peoples money, to carry out surveys which only required common sense.

  2. Another Pissed Off IFA 5th July 2011 at 1:58 pm

    Did someone deliberately set out to make life as complicated as possible for adviser and client alike or did it just drift towards the chaotic end of the scale all by itself?

    Now we know why the commission model is so successful: IT WORKS.

    If the RDR requirements are almost impossible to explain in the English language you can bet that neither client or adviser will fully understand it. And that’s even without HMRC suddenly being awoken from its slumber by the thought of all that extra VAT lolly for HM Treasury. .

    What’s the betting that in a few years (months?) some bright spark at the FSA dreams up adviser payment by commission as a solution to the complications caused by the RDR.

    Truly, the camel is a horse designed by a committee.

  3. Steven Farrall (Adviser Alliance) 5th July 2011 at 1:59 pm

    What a spectacularly ignorant post.

    Clients (‘consumers’ if you will) buy on differences in offerings, not the similarities. Economic agents make selections according to their own needs and motivations which are entirely personal to them. Enterpreneurs make all sorts of different offerings to try and find out what customers want and will pay. Without that diversity you get stagnation.

    Which is the key problem wih the RDR – it’ a Fabiansitic paternalistic unaccountable bureaucrats wet dream as to what they think is right for everyone else. What spectacular arrogance.

    Good Grief, it’s no wonder the FS business is in a mess if ignorance like this is trailed as sensible comment.

  4. Phil Billingham 5th July 2011 at 2:00 pm

    With Due Respect!

    I am sorry – but to have a ‘misselling’ warning 18 months ahead of the RDR date is a bit rich.

    It’s really not that difficult – can we NOT do the whole ‘Chicken Licken’ the sky is falling down please.

    It is, remains, and always will be the clients money. How they choose to pay us is between us and them, and how much is also between us.

    The day a Standard firm, with a Standard Adviser delivers a Standard service to a Standard Client will mean that tick box approaches work.

    Until then, can we just have a bit of common sense?

    Rant over. Honest. I’ll sit down now…..

  5. Which is the key problem wih the RDR – it’ a Fabiansitic paternalistic unaccountable bureaucrats wet dream as to what they think is right for everyone else. What spectacular arrogance.
    Well done Steven
    Best description of RDR to date!

  6. What a good idea lets have the same charge as large accountancy firms charge. Lets start with say £500 per hour then see how many clients will pay that fee. This should apply to all banks building socs etc. The 3000000 consumers who cannot get advice after RDR will be completely left in the cold. Only those in the FSA will be able to afford any advice!!!

  7. Richard Brydon 5th July 2011 at 2:25 pm

    Steven, brilliant. Probably the best description of RDR and our regulators that I’ve heard anywhere. And boy, have I heard some crackers.
    For the sake of it, I’ve just filled in a CII survey, part of which referred to new entrants to our industry. How can anyone consider actually joining this industry unless someone is telling them porkies? It’s akin to volunteering for firing squad practice from the wrong end. You’re bound to cop it in the end.

  8. Bearing in mind we are part of Europe (whether that is good or bad, I will not debate) and that the problems with banning commission, VAT and charegs taken for advice from pensions when they are a fee and NOT a commission have not as yet been identified, might it not be a good idea to revert to the name “Custoemr agreed remuneration” rather than adviser charging and delay a ban on commission until something is agreed IN WRITING with HMRC on both VAT and the pension advice issue?
    As things stand with the intended changes in 2013, if a client has £100,000 in a pension and wishes to vest it and the best advice is that they do NOT take a PCLS and only purchase an investment based annuity (a non investment based annuity would not be an issue under the RDR as it is insurance where there is no commission ban, unlike an investment linked annuity), then how is the advice charge to be met if they have not a penny outside a pension? The commission ban would mean there would be NO offset and it could be argued that whilst some intermediation had taken place, that the predominant service was advice, which is VATable PLUS more importantly, the advice would potentially be an unauthorised payment resulting in loss of tax exempt status on the whole pension fund.
    Have I confused the issue above or have I stated a problem that still remains with RDR, that the FSA have not got sorted yet?
    Oh and I am NOT anti much of what the RDR is trying to achieve as I a, adviser charging, have increased my cap ad as required and having passed R03 this morning, only have R01 to sit next Tuesday and I will have my level 4, but everything for me is screaming DELAY RDR implementation and put in place steps to be achieved before implementing RDR in stages as each is achieved, without a rigid date for everything to be implemented.

  9. Another Pissed Off IFA 5th July 2011 at 4:02 pm

    It is becoming clear that RDR was never thought through. It should never have gotten off the drawing board.

    Ho Hummmm….. A government department pushing untested ideas down peoples’ throats….

    Now there’s a surprise!

  10. The same approach for all is clearly nonsense, but what isn’t nonsense is if we get to a situation where a platform or provider get chosen because of their billing and collection systems …just a different type of bias !

  11. It seems that we are sliding down a cliff face of ignorance and bureaucratic pigeon-holing until we splash into that thick mire of homogenisation that the regulator seems to fancy.

    Whatever happened to choice and free will? Whatever happened to commonsense?

  12. Duncan Carter 6th July 2011 at 6:13 am

    This is a nonsensical article and notion. As Phil B articulates above, it has nothing to do with anyone but the client and the firm. Would KPMG welcome a prescribed format/limit as to how it charges fees – having worked for a national accountancy firm, I doubt it very much!

    One has to wonder what is the motivation behind such articles, especially from firms that have an opaque relationship with governmental and quasi-governmental bodies.

  13. When will the industry realise that in fact our biggest bane isn’t so much the Regulator, but the big 4 accountancy firms who the Canaries rely on for much of their outsourced work (which is considerable) not to mention their seconded staff.
    If you need proof of the hegemony that these firms have achieved just look at the offices they occupy (not to mention the fees they charge) – not bad for an audit or two!
    I understand that each one of these firms is currently defending some sort of legal action or another. Be it from the UK or the US. These jumped up bean counters decided to become ‘consultants’ competing (so they believe) with the likes of Bain and McKinsey. Their gravy train has been overflowing.
    It seems that practically every utterance is designed in one way or another to trawl for business.
    I can only hope that the forthcoming OFT investigation will clip a few wings.

    Oh and by the way I guess Mr Eaton doesn’t really mean cash. Surely he wouldn’t condone the expansion of the Black Economy and the avoidance of tax?

  14. There are a few ingnorants around here. Clients don’t pay for advice. They actualy pay if you offer them value. I have asked the bottom part of my client bank for a retainer of £25/month and each one has ‘subscribed’.

    Yes, it is true there on be anymore commissions of £5,000 + but I don’t care I never charge one of those.

    The power lies with the client and this is the way it should have been. He establish your renumeration, he hires or fires you.l

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