With RDR proving to be more beneficial than most were willing to accept, is it time to look at change more positively?
Many years ago, in my card-carrying leftie phase, I recall being impressed by a quote from the late Chinese premier Zhou Enlai, who, when asked about the impact on society of the French Revolution of 1789, is reputed to have replied: “Too early to say.”
Zhou’s gnomic comments appeared to suggest that the long-term effects of historic events cannot always be analysed immediately after they have happened. It may take decades, perhaps even hundreds of years, before their true consequences are fully understood.
It was only after Zhou’s death that it emerged this famous quote, made in response to a question by US foreign policy adviser Henry Kissinger in 1971, actually referred to the impact of the French students’ and workers’ revolt in May 1968.
But while there may be times when we have to wait for generations to understand an event’s influence, at others we can discern the truth in a few years.
Nowhere is this more the case than in the area of financial services, whose entrails are regularly picked over by commentators while the carcass is still warm.
The aim, supposedly, is to provide an accurate interpretation of the state of the industry, hopefully as a guide to future action.
In reality, one of the favourite sports of some self-styled experts is to use whatever facts are to hand to prove the point they want to make, reinforcing their own prejudices and those of their audience at the same time.
So it was, for example, that during the endless discussions about the impact of the RDR before it came into effect in December 2012, the overwhelming sense was it would prove to be a disaster for advisers.
Just about every potential catastrophe that could befall the industry was laid out in advance. The drive for higher levels of exam-based qualifications would push advisers out of the market. The move from commission to fees would cause havoc to their incomes.
Profits for firms would collapse, decimating the market as everyone took shelter within the newly created rank of restricted advice.
Indeed, tales of imminent apocalypse were two a penny back in 2009, 2010 and 2011.
This makes the FCA’s most recent retail intermediary market update so fascinating.
It tells us total reported annual revenue from retail investment business increased from £3.95bn to £4.42bn, or 12 per cent, between 2017 and 2018. The revenue for 2018 was up by a stonking 58 per cent on 2014.
The growth in income comes while levels of commission paid to intermediaries in the retail investment market continue to decline, from 20 per cent in 2017 to 17 per cent in 2018.
This reflects a trend in evidence since the implementation of the RDR at the end of 2012.
The other intriguing aspect of the new FCA figures is what they tell us about the advice firms that are the most successful.
The average retail investment revenue per sole trader business was £164,082. Average pre-tax profits were almost £89,000 and average retained profits were £32,000.
In contrast, firms with between six and 50 advisers had average retail investment income of £194,000 per adviser. But the average pre-tax profit per firm was £457,500 and retained profits were an average of £192,000.
Average retail income for firms with more than 50 advisers was on a par with sole traders – yet pre-tax losses per firm averaged £539,000, providing further proof, if ever it were needed, that some of the bigger advice firms are shockingly bad at running national businesses.
But it also shows that sole traders and small firms who were forced kicking and screaming to revise their business models – and some might say they have done everything possible to avoid embracing fees more fully – have nonetheless done extremely well since the RDR.
The irony is that I recall how, back in March 2010, trade bodies and even research by the FSA gloomily predicted up to 20 per cent of IFAs would leave the sector within two years. The FSA’s own study by the consulting firm Oxera found that up to half of firms with revenues under £50,000 were either “very likely” or “likely” to close or sell up.
What very few people noticed was that Oxera’s research was predicated on what IFAs were telling it they would do. In other words, the oft-quoted pessimistic stories every trade body was making use of were based on IFAs following through with their threats to leave the industry. And, of course, they didn’t.
What does all this tell us? One of the lessons is that deliberately spreading a doom-laden scenario to make a political point and boost your trade body’s membership needs to stop.
As for Zhou Enlai, he was both right and wrong. A few years is all it has taken to prove that the impact of something as seismic as the RDR has actually been far more beneficial for advisers than most were willing to accept at the time.
Nic Cicutti can be contacted at firstname.lastname@example.org