The principles of the retail distribution review – transparency, improved professionalism and removal of product bias are just. But if our profession is unable to provide the right sort of advice, these positives might be negated by an incorrect remuneration model that does not support the needs of Middle England.
Forecasts suggest the number of IFAs will reduce dramatically which will mean increased demand for adviser services, particularly in the affluent market. This may seem like good news for some but it creates a different problem as it will further limit the advice for groups which are already constrained in terms of advice.
The industry has lost sight of the middle market and the need to widen advice to as many consumers as possible.
The obstacle of fewer IFAs must be overcome but the RDR will mean those IFAs that remain will have to adapt to rebuild the trust and confidence of disillusioned consumers.
Advisers will have to be better qualified, support mutual funds rather than insured funds, support the competition from more direct-to- consumer channels, cope with the demand in investment-led Sipps and change their remuneration models. This may sound daunting, especially if moving to a fee or adviser-charging model but there are three types of remuneration structures/contracts available in the run-up to the transition.
First, in the very short term, contracts will still offer commission and charging structures which have been seen historically, for example, enhanced allocation rates and set commission levels which are funded by the provider and recouped over the life of the contract.
Second, the next step in helping IFA firms is to offer contracts which provide funded remuneration in a transparent way, with no enhanced allocation. This will move the onus of persistency down the supply chain to the client/adviser. There will be an explicit charge made by the provider for advancing the adviser’s remuneration, with the level of remuneration and timeframe for repayment agreed between the client and the adviser.
The final step is to offer unfunded or matched remuneration for firms that complete the transition before 2012 or are already operating on a model such as adviser- charging. The provider merely facilitates payment, with details agreed between client and adviser, and deducts at the time of payment.
Recent research implies that consumers have little confidence in retail, financial and professional advisers. Rebuilding trust and creating a profession out of an industry must be the holy grail of the RDR.
Consumers should be able to expect to understand what services they pay for and when they will receive them. Transparent disclosure of advisory costs will create a more competitive market for advisory services and will end the concept that advice is free and it is only the product you pay for.
Mike Kellard is chief executive officer at Axa Wealth