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RDR could hit Middle England

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

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

  1. AIFA, Skandia, Bankhall and now AXA.

    And just in case these guys wanted little company:

    Otto Thoresen – CEO Aegon “The RDR is only helping wealthy customers”

    AXA April 2009 “We will lobby the FSA to make sure the RDR does not mean less are able to access advice”

    David Cox – SuuqeaMarch 2009 “Two million clients could be left without an IFA after RDR – 40% could leave the industry”

    FSCC January 2009 “Financial advice will be less widely available post RDR”

    Institute of Financial Services “RDR will impair financial advice before improving it”

    Alasdair Buchanan Scottish Life November 2009 “Sales advice is a real cop out and extremely confusing to investors”

    Stephen Gay – AvivaJune 2009 “The regulator has failed to consider the danger of adviser charging limiting access to advice for those on lower incomes”

    Lord Lipsey “Consumers in the middle (not high net worth or money guidance fodder) to be sold products by banks under the contradiction that is sales advice”

    Walter MerricksChief Ombudsman “I think it would be unwise to count on the assumption that complaints from the retail investment world are suddenly going to go down as a result (of the RDR)”

    Deutsch Bank reportAugust 2009 “There has been industry talk of 30% or even 50% if IFAs exiting the industry post 2012, which is not impossible”

    Paul Selly HBOS “Bancassurers set to benefit”

    Richard Howells Director Zurich LifeJune 2009 “The big question mark is still around what benefit it will have for the ultimate consumer.I am still not convinced that all of these changes, when you sit down with a consumer and explain them, actually give rise to a consumer benefit that I can really hang my hat on.”

    Martin Lewis Money Saving Expert June 2009 “There’s a worrying possibility that the FSA is about to kill off independent financial advice in the UK for all but the wealthy. I do hope I’m wrong. I’m not convinced most people will want to pay for advice. The commission route has the advantage that you don’t pay a fee each and every time you want information; you can go without the worry of laying out cash. What I find most galling though is that bank-based advisers – those primarily responsible for PPI misselling, endowment mis-selling, investment mis-selling and generally poor advice all round are still to be allowed to be remunerated based on the number of sales.”

    Janet Walford OBE, Editor Money Management Sept 2009: “I am not paranoid enough to believe that the FSA has a hidden agenda to do away with small IFAs, but the law of unitended consequences may well mean that this will be the result. This is especially the case when set alongside the myriad of other proposals that are costing some £430 million to set up, with ongoing fees of £40 million pa thereafter, a mind boggling amount of cash.

    Peter Hamilton barrister, Source: Money Management Oct 2009, Scrapping the FSA by Marie Jennings MBE: “The Financial Services and Markets Act does not permit the FSA to cancel an authorisation simply because the FSA has changed its views on what the appropriate qualifications should be….It is one thing to impose new rules for new entrants to the IFA profession, it is quite another thing to disqualify someone who is already qualified.”

    David Hazelton of Tax Incentivised Savings Association(TISA) 30/10/09: The RDR could be detrimental to consumers both in terms of higher product charges and an increase in the cost of advice, warns the Tax Incentivised Savings Association(TISA). Implementation costs for the RDR are being “seriously underestimated” and product charges will consequently have to be raised.

    Bankhall managing director David Golder 03/11/09: “We say write to the regulator, write to your MP. Do not let the FSA get away with some of the things that will lead to the widespread decimation of our industry.”

  2. Spot on, this is exactly what is going to happen.

  3. A clear trend has developed where many of those who sat on the fence or, in some cases, actively welcomed the RDR proposals have now realised the monstrous implications of the agenda.

    The FSA must bite the bullet and accept that many of the proposals are flawed beyond redemption and must be cast aside in the interests of consumers, advisers and plain old common sense.

  4. By all means take steps to improve the industry, but do not dispose of the many people whom have contributed in a positive way.The RDR has clearly not been thought through,nor has quality advisors been sufficiently vetted.

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