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Paradox lost on advice v distribution

The paradox of the RDR is that the D stands for distribution (which is what the banks do), yet the principal focus of the RDR appears to be standards of advice, which is what IFAs provide.

Now, we all know there are things wrong with the industry’s historic and present distribution model, primarily because its principal driving force is the selling of products all too often merely dressed up as advice. However you try to cut it, most of the money earned in financial services is from the sale of a product rather than the provision of advice.

By and large (there are exceptions), the IFA sector is doing its best to change course and to provide quality advice that is not aimed solely at selling a product or, at least, to provide very thorough and carefully considered advice as to the suitability of a particular product.

However, the facts remain that much of our advice is product-related (a pension plan for retirement saving, a life policy for family protection, etc) and that clients are generally happy for the cost of advice and implementation to be built into the product.

So a wholesale shift in business models and consumer preferences cannot be forced in the space of a few years (if ever) without fundamentally damaging the machine.

Most people cannot or will not pay what any half-decent IFA would need to charge in fees, not least because around 20 per cent of his turnover is already devoured by regulatory levies, compliance support services, professional indemnity insurance, back-office systems and so on – and
that is before we start talking about office and staff overheads.

The FSA witters on about product and commission bias despite admitting it has no firm evidence of either in the IFA sector. It also witters on about raising standards by exams or equivalent assessments but it has no evidence of bad advice being given due to poor technical knowledge. Consider:

A man inherits £50,000 and arranges an appointment with his IFA to discuss how best to invest it. His IFA duly (ultimately) recommends, both for the client and his spouse, a spread of investments ranging from cash Isas to unit trusts. Commission is agreed at 3 per cent.

Meanwhile, assorted lights have started flashing at the client’s bank and pretty soon some hotshot salesperson is on the phone pressing for “a financial review”, the swift conclusion of which is to stick the whole lot into a five-year life insurance investment bond paying 7.5 per cent commission. This scenario is not fantasy, it is daily fact.

Could the FSA please explain just where the industry’s biggest issues with product and commission bias lie?

It is all very well requiring tied agents to mention in passing that they “advise” only on the products of one provider but the implication of such a statement is the chosen host company is so good that no others need really be given serious consideration.

Would not that whole scenario change dramatically for the better if bank salespeople were required instead to notify their prospective customers that “we advise only on a tiny fraction of all the financial products available across the whole market, many of which may be better suited to your particular circumstances (not least on the tax front), objectives, attitude to investment risk and time horizon”?

Such a nettle is one that the FSA would be extremely reluctant to grasp. And so, instead, we have the distraction of the RDR, described by John Redwood at the recent Sesame conference as “A sledgehammer to miss a nut.” How very apt.

On another point, I recently heard on BBC Radio 4 Christopher Pond from the FSA being interviewed about a study it had undertaken into “financial capability” at family level, including the degree to which many families overstretch themselves at Christmas.

Why should the financial services industry be paying for the FSA to undertake studies of this nature?

Our business is the provision of advice on and products for people to invest what they already have, not about family budgeting and domestic financial management. That, surely, is the realm of the CAB or something similar. The only people able or willing to pay fees for advice of that sort are those who almost certainly do not need it.

The CAB is Government-funded, whereas the FSA is funded by the financial services industry which has little if any say in what it is coerced into paying the FSA.

Is this not another example of either FSA doing whatever it pleases or, despite its constant denials of being an instrument of Government, being exactly that?

Julian Stevens
Harvest IFM, Bristol


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. Citizen’s Advice is NOT government funded it is an independent charity. They do bid on government contracts, but then so do many charities, this does not change the fact that it is not a government body nor is it a quango.

    Moreover the Citizen’s Advice Bureax, the CABs, are all independent charities of their own separate from the main Citizen’s Advice umbrella and responsible for their own funding. Check your facts before you rant.

  2. Martha – I don’t think Julian was having a go at the CAB. I think they do a very good job with limited resources. What you do need to do however Martha, is check your own facts before YOU rant as the only use of the word quango appears to be by you…. plus Julian did NOT say the CAB was a government body and correct me if I am wrong, bidding for a contract and winning it means you ARE part funded by government.
    Just to clarify again, I am NOT criticising CAB and I suspect that Julian would not either, what we DO object to is having to pay fees to the FSA (an unelected quango) who then carry out consumer education when it should be paid for by direct taxation (or not, depending upon what the elected government chooses to do with the money it collects through taxation)

  3. Excellent article, one of the clearest at trying to explain to the FSA and the Government that they are barking up the wrong tree. Result of current lopsided and expensive consultation is that the majority of consumers who need advice and as they get older – independent advice, will be unable to afford it. Secondly, they will either find themselves taking advice from less trained and more biased advisers or salespeople in banks and large financial institutions more interested in volume and profit. The very issues RDR was supposed to address. See my recent talk at NMA conference in January on the same subject. Some of us do not want to be forced to become “wealth managers” for a tiny fraction of the UK population. I hope government is taking note of what a few of us are saying for the sake of social cohesion in future decades.

  4. well said Julian God Bless you

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