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?
Harvest IFM, Bristol