The Sandler report has highlighted the need for a radical shake-up in the savings industry. Consumer needs have been neglected in the industry battle to secure distribution and market share.
We welcome the possible unbundling of the cost of advice from the product cost. Complex products and pricing structures combine in an opaque manner the cost of advice and the distribution costs. No wonder consumers are bewildered about what they are paying for and how.
The nub of the problem is that the status quo rewards distribution power rather than quality of advice. The purpose of all the effort from the Government, FSA and Sandler is to improve standards.
The best way is to put the onus on advisers to demonstrate their advice adds value. Unbundling can achieve this at a stroke. If consumers are charged separately for the product and the advice, they will pay less if they are not taking advice.
That may sound like the death knell for advisers but it should be the greatest possible shot in the arm. We all agree most people would benefit from good, independent advice.
Unbundling would give advisers the opportunity to demonstrate that in a context where their impartiality can no longer be questioned. If they can do so, they should expand their reach.
IFAs should negotiate remuneration with the consumer. This does not necessarily mean that commission should be abolished.
Unbundling, combined with differential pricing, would mean that clients who want to reward their adviser by way of producer-provided commission should be allowed the freedom to choose such a method.
Obviously, this will not be an easy or overnight change. There is a clear need for good quality, sound advice for consumers. But it is hardly surprising that few consumers would be willing to pay separately for financial advice when this cost has been bundled together in the price of the product for so long. It is not understood that advice is a discrete and value-added part of the process and was never free.
IFAs will be under even more pressure to demonstrate the expertise and effort in advising a client and making a recommendation. This will be a vital step in improving the overall standards of advice.
But I have concerns that all the attention is being focused on the top end of the market. The proposal is that only advisers who agree a charging scale with clients in advance of the provision of advice can call themselves “independent”.
We need to identify ways of extending unbundling throughout, from tied agents to direct salespeople.
Sandler has generated awareness about the role of the FSA, not only as a regulatory body but also as a provider of generic advice to the public. This is a positive move and I believe IFAs would welcome support in interpretation of rules and implementing them.
On the consumer side, the AITC is delighted to see the report's acknowledgement of poor consumer financial knowledge and proposals on how to counter this. We welcome the proposal that the FSA's consumer education activities should be given additional resources, with a ringfenced budget. Of more importance, however, is the longer-term financial commitment and involvement of all industry participants in a plan for delivering clearly specified education objectives.
If Sandler's proposals are implemented, the playing field will be levelled for products that offer consumer advantages such as investment trusts. The AITC has lobbied hard to achieve awareness of the unfairness of the VAT treatment of investment trusts in comparison with other mutual funds. We are concerned there is no stamp duty reserve tax exemption within IPAs for investment trusts. We welcome Sandler's acknowledgement of these inequities.
Daniel Godfrey is director general of the Association of Investment Trust Companies