The phrase “RDRfriendly” is in danger of becoming as overused in our industry as WYSIWYG was in computing a few years ago.
A major plank of the RDR is that advisers and providers should be able to say to consumers “what you see is what you get”. RDR-friendly must mean, at least, that everything should be clear to clients, with no hidden payments or charges.
The obvious WYSIWYG in the RDR applies to remuneration received by advisers for recommending packaged products. Relationships will in many cases change fundamentally, with adviser-charging meaning that remuneration is agreed only between advisers and clients. Providers will have no say in the amounts involved but may facilitate payment through packaged arrangements.
The FSA has made it clear in its latest feedback statement that this extends beyond payments made directly by product providers and includes commissions from discretionary investment managers.
Where an adviser recommends the services of an investment manager, commission can only be paid if it has been agreed with the client.
When advisers recommend distributor-influenced funds, there must be no hidden income, such as remuneration for sitting on a governance committee.
In practice, it will probably be most straightforward if all payments to advisers come either through fees or directly from any packaged products recommended.
The FSA has also been considering the position of plat-forms under the new regime and is concerned that everything should be clear and above board.
As well as the direct application of adviser-charging to payments from platforms, the FSA is wary of rebates from product providers to customers that appear to offset adviser charges.
The principle of transparency is not just about payments to advisers. For example, in its discussion paper on platforms, the FSA states: “If a platform retains a proportion of the interest paid on cash accounts, it is important that this is clearly and prominently disclosed to customers.”
This reinforces the priority that the FSA attaches to clear explanations of charges and it states in its review of platform operator disclosure documents: “The disclosure of platform fees and charges in our sample was particularly poor”.
The message is clear – unless WYSIWIG applies consistently and clearly, the FSA will continue to express concerns and take action.
This means that complete unbundling of charges must become the norm in an RDR world. Just as no remuneration should be paid to advisers that is not pre-agreed with the client and clearly separated from other charges, the differentiation between admin costs and investment costs must also be clear.
It will be unacceptable for provider admin costs to be subsidised by reductions to interest rates paid on cash balances or rebates from platforms or investment managers.
That is a fundamental change from where we have been in the past. The principle behind stakeholder products was that everything was bundled into a single annual management charge and there was no separation out for customers of how that was split between the costs of administration, investment management and advice.
The key principles were simplicity and comparability, and one of the challenges of the new regime is to retain these as much as is feasible while giving the highest priority to transparency.
If we can achieve that, WYSIWYG will be one of the most significant improve-ments of the RDR and will really benefit consumers. Only products that already achieve that goal can currently be truly described as RDR-friendly.
Ian Naismith is head of pensions market development at Scottish Widows