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Myths of the RDR

The FSA released its final feedback statement (FS08/06) on the retail distribution review last November. Since then, there have been numerous articles and discussions on the likely impact on the industry in general and financial advisers in particular.

At a personal level, over the same period, I have been involved in numerous meetings and seminars with IFAs at which the RDR has been discussed and one thing is clear – there are some widespread misconceptions about some of the proposals.

What are the most common misunderstanding and how do they compare with the reality?

Myth 1: My clients won’t be able to afford to pay for advice

DP07/1 suggested that professional financial advisers must be remunerated by fees. It is easy to interpret this as a requirement to ask clients to pay cash for financial advice, in the same way as they do for legal or taxation advice.

However, closer reading shows that fee in this context does not mean a cash payment, it means the cost of advice must be separately agreed from the cost of the product.

There are two issues with most existing commission models. First, the amount paid to the adviser for their services to the client is determined by the provider. Second, the amount paid takes no account of the time taken or the expertise involved.

As an aside, under an AMC- based commission model, it is impossible to predict exactly how much the client will eventually be charged. The recent feedback statement (FS08/6) confirmed that once the cost of advice has been agreed the actual payment may come from the product. This is commission.

However, it is commission determined by the adviser, and agreed with their client, rather than being decided by the provider, as a percentage of an unknown fund value.

As a result, advisers who are currently remunerated by commission,and whose clients cannot afford to pay a separate fee may still be paid in this way. If the advice given does not result in a product sale, the client may still have to pay a fee but this is no different to the current position.

Myth 2: Providers will not be able to compete

It is true that product providers will not be able to try to increase new business by paying higher commission. The level of the advice charge will be outside of their control.

However, the actual product charges will still be within the provider’s control so if a provider chooses to compete by being the cheapest on the market, it can still do so.

Providers which choose not to compete on price alone will have to offer excellent product design, investment options and levels of service which will be easier for some than others.

Myth 3: It is all about examinations

The FSA is not saying that sitting exams will make everyone into a good adviser but it is certainly the case that it expects that all good advisers will have taken, and passed, exams as part of their commitment to providing a professional service. But exam passes are just a start.

The requirement to achieve diploma level 4 will not go away and some activities may require further qualifications. The FSA will also expect to see skills-based measures in place.

Treating customers fairly requires adviser firms to have measures in place to assess whether advisers are providing a sufficient quality of advice. Last year’s reviews, investment quality of advice processes II and pensions switching, also demonstrate that a good quality, consistent advice process is every bit as important as exam passes.

Myth 4: It is all just extra work

It is easy to see some of the FSA’s proposals as simply creating extra work but many of them are good business practice.

According to recent studies, “RDR-positive” firms have been less affected by the difficult economic conditions.

Research by NMG Financial Consulting shows firms which are working on a fee basis and who have made progress towards the required qualifications have reported an average increase in income of 1.1 per cent in 2008 compared with an average fall of 12.5 per cent at those which have a negative attitude.

One reason for this is that firms remunerated by fee and trail commission have ongoing income when things get tough. Another is that clients are showing signs of preferring qualified advisers.

Unbiased.co.uk has reported that 35 per cent of all enquirers using their Find an IFA service are selecting an adviser on the basis of their incremental qualifications.

The RDR will force many adviser firms to re-examine their business practices and this is no bad thing. Taking the time to review your current client base, how it might look in future and what remuneration model will work best in future is simply good planning. It allows you to concentrate your resources, to focus on profitable activity and clients.

Myth 5: If I keep my head down it might all go away

As an industry it is probably true to say we are often more reactive than proactive. Many of us probably prefer to wait until regulation forces us to act before we consider what, and how, we need to change.

It will obviously be possible to wait until the implementation deadline of December 2012 before taking action, particularly since we are waiting for greater clarity on the detail in many areas.

However, we already know enough about the professional advice space to take action now. It will involve adviser charging and qualifications. We know broadly how these will work, and we know they are almost certain to happen. Even more important, many of these proposals also result in good business practices so it makes considerable sense to start planning and making progress now.

As Darwin put it: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

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