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MM Leader: Are the RDR pessimists winning out?

Amongst the research put out by Ernst & Young last week, two figures stood out: three plus a half and 3,000.

Its review of the financial services industry is the first real attempt to quantify the impact of the RDR and it shows the advice sector is being hit harder than all but the most pessimistic predictions had estimated.

In addition to the thousands of advisers who have already left the industry, the Ernst & Young report predicts a further 3,000 advisers will leave the industry by the end of the year.

If this is in any way accurate, this is worrying indeed.

The other figure that stands out from Ernst & Young’s analysis is the general trend for firms to use a 3 per cent initial 0.5 per cent ongoing charge for their advice.

As this is a mirror image of the commission structures used by most providers before the RDR has been cited by E&Y as strong evidence that many advisers did not have a fully coherent charging structure in place by 1 January and having to complete it on the go this year.

The lack of variation between pre- and post-RDR charges is, according to E&Y, evidence that many businesses have failed to properly understand the costs of them doing business.

If its analysis is correct, a further drop in adviser numbers is likely, as changing to a fee structure that clients will accept is considerably harder without knowing what level of charges the business needs in order to remain profitable.

Hopefully, the E&Y prediction will prove to be false but time is running out for advisers to get to grips with the practicalities of the RDR.

Regulation Frustration

The results of the FCA Practitioner Panel survey into attitudes towards to the regulator should come as no surprise.

If anything the fact that only 37 per cent of respondents think the FSA was ineffective suggests the survey respondents were firmly at the optimistic and forgiving end of the industry.

The problems faced by smaller firms are many. Excessive levels of regulation and increased regulatory costs are two big problems but other more practical issues, such as regulatory staff not being able to answer advisers queries, are also a source of frustration.

The FCA has made the right noises in its response to the survey, but it needs to back its words with action and prove it can make it easier for financial advisers to run their businesses.



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There are 13 comments at the moment, we would love to hear your opinion too.

  1. Soren Lorenson 10th May 2013 at 9:04 am

    The primary difficulty in putting together a charging structure that clients will accept is that our charges have to include all of the following that have little or no benefit to our clients.
    FCA Fees
    FSCS levies
    Compliance Consultants
    Excessive postage & printing costs cause by reams of paper that no client will ever read.
    Excessive PII costs caused by claims culture
    A cost for the risk to our business
    Distribution costs for product providers
    Liability for failed product providers (even if we never did business with them)
    Liability for failed regulators

    In addition to these costs we also have the standard costs of running a business. No wonder its tough to make a profit.

    Finally, as we all know to our cost, many of these costs are random, excessive and totally out of our control making it very difficult to know “what level of charges the business needs in order to remain profitable.”

    Something has got to give…so far it has been around 3000 advice jobs and the support staff that go with them.

    Is that an “acceptable cost” Sir Hector?

  2. I agree with Soren. My tunrover is about half what it used to be and my net profit before tax including directors emoluments is now about 1/4 of my turover. That’s 3/4 of turnover goes in costs of just being there before I even earn to pay my own personal bills.
    I am still here despite RDR and tunrover is going back up, but only a little.

  3. Could this be the same Ernst & Young who were Lehman’s Auditors and the auditors of Equitable Life? Who were recently fined $123 million in the US for aiding and abetting wilful tax avoidance. Who in 2009 were fined $125 million for the negligent auditing of Sons of Gwalia? Who were accused of accounting fraud by the SEC and settled for $8.5 million which was at the time among the highest such settlements that an accounting firm had ever paid the SEC.

    If this is indeed the same firm, what credence should we place on any findings of theirs?

  4. Nicholas Pleasure 10th May 2013 at 10:37 am

    Felix Godwyn | 10 May 2013 10:15 am

    Great post!

    I guess we should draw the following conclusions:

    1. They are very very good at charging fees
    2. The FCA doesn’t really mind who it deals with.
    3. Ethics only apply to IFA’s

  5. Spot on, Soren.

  6. I am so glad I sold 3 years ago when companies were willing to pay for a good book. With trail commission being banned by providers, what value does your business now have??

  7. Stephen Rowland 10th May 2013 at 1:34 pm

    The truth is – the longer you hold out against the tidal wave of discrimination against Financial Adviser’s – the less the Regulator will make your business worth!

    The writing is on the wall (especially for very small companies) & has been for many years – just more obvious & vindictive now!

  8. Simon Webster 10th May 2013 at 1:38 pm

    Trail is being switched off, so what! We are just accelerating our switch of those clients on .5 % trail to 1% adviser charge – though we are waiting until there are a few more clean funds to chose from…We will probably lose a few clients that we have not spoken to for years. But we will not lose half so we will definitely be better off.

    We have a 3 + 1 model. Our clients are happy and we are making money. We are recruiting and trying to acquire businesses.

    Anonymous 9.37 join your business to someone local who is making a go of RDR and there are a fair few around. Benefit from the many economies of scale and concentrate on your client relationships. You’ll make more money and have more fun. You currently get 25% of what you write – our self employed advisers get 60% and we pay all fees and software. I know others who are also doing the same sort of thing.

  9. Simon Webster 10th May 2013 at 1:40 pm

    As to value 3 times 1% adviser charge is worth more than 3 times .5% trail so my capital value is increasing and there are plenty of buyers still out there.

  10. Julian Stevens 10th May 2013 at 8:14 pm

    The fact that, on top of everything else, IFA’s are forced to pay a totally disproportionate share of the regulators’ overall costs points strongly to a carefully and deliberately contrived plan to destroy the IFA sector.

    If alternative careers were readily available, the attrition rate would be higher still. If a beast of burden is continually overloaded, eventually it will simply collapse. Is this what the regulator wants? Unless some real relief is forthcoming soon, this can be the only outcome.

    So much for Hector Sants’ estimated attrition range of between 8 and 13% ~ it’s already gone well beyond that and we’re less than 5 months past the FSA’s Red Button Day.

    Like many others, I (just) managed to clear the Level 4 hurdle, but I really wasn’t expecting 2013 to be an even worse year than 2012. The FSA’s super-regulation by proxy (for members of a network) is just totally OTT. For example, we’re all but instructed now to turn away anyone who wants to invest some money should they happen to have an overdraft, a mortgage, an HP agreement, a negative balance on their credit card, a potential LTC issue or just about anything other than a massive amount of spare cash swilling about and no need for extra income. It’s become absolutely bloody ridiculous.

    Where’s the balance? Where’s the proportionality? Where’s the targeted, risk based approach to regulation? All ignored and sacrificed on the altar of achieving the unachievable, a Utopian world in which every piece of advice is utterly perfect, exhaustively researched and nobody ever takes a wrong financial turn. Meanwhile, thousands of careers and livelihoods are trampled underfoot, crushed and flushed away down the drain into the sewers where the regulators evidently consider they belong.

  11. @Julian
    Julian you have amazed me. You are usually, erudite, logical and on the ball, but this latest comment confounds me. “…instructed now to turn away anyone who wants to invest some money should they happen to have an overdraft, a mortgage, an HP agreement, a negative balance on their credit card…”

    Have I got this wrong or isn’t it far preferable to get rid of debt first? An overdraft can cost 14% and more, Credit Card debt racks up at least 20% – even a cheap mortgage costs around 3% – 4% – all which have to be paid out of net income. So where can you get a risk free guaranteed rate of return equivalent to these? To me it makes no sense investing anything if you are in debt. (With the possible exception of a mortgage). Debt is insidious, pernicious and the harbinger of untold misery. Surely we have all read Dickens.

  12. @ Harry, I agree with you there.

  13. The FSA never wanted to deal with small firms – this came out when we had a visit a few years ago.

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