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RDR could reduce Omo usage further

The Retail Distribution Review is likely to see fewer pension savers exercising their open market option, according to Fitch Ratings.

In a special report on the RDR, the ratings agency says the fact customers will be faced with explicit fees for investment advice will drive some
away from the IFA sector.

Senior director for insurance David Prowse says: “Customers will be faced with explicit, direct fees for investment advice – something they may currently perceive to be free because charges are somewhat hidden within premiums.

“We believe that the new transparency will drive some insurance customers away from the IFA sector and towards cheaper, restricted advice or no advice at all, and pension savers may be less likely to exercise their open market option when converting their savings to an annuity at retirement.

“Although most annuities should be easy to compare, some customers may not be aware that they can easily look for a better annuity deal themselves, without having to consult a financial adviser and pay the charges that this would entail.”

Fitch believes the switch to adviser fees should end commission‐driven sales and in theory increase trust in advisers. But the firm does not expect this to be a significant outcome in practice, given many consumers’ scepticism towards financial services.


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There are 20 comments at the moment, we would love to hear your opinion too.

  1. As recent surveys have shown people do not want to pay fees. If only the FSA listened to consumers and got off its high horse and did the job it is supposed to do

  2. On the contrary i have found that clients from all walks of life will pay a fee for independant advise if the option is given to them in an open and positive maner.

    I have been working a RDR model for some time now and have been suprised at the response from clients when discussing the fee option

  3. Given that annuities are about the only area where products cannot be unravelled if someone gets it wrong, and commission bias is largely irrelevant as most companies pay exactly the same for standard products – perhaps this is yet another area where RDR is doomed to make things worse for all concerned except the pension plan providers who offer derisory terms for maturing plans?

  4. It is all part of the FSA process to ensure that there is less misselling. As clients cannot afford to pay anyone to sell them anything there will be a clear reduction in the incidence of misselling. And, of course, it continues to be those in society who have the least who suffer most. If only we had a regulator who considered the effect of its actions on consumers!

  5. It shouldn’t make much difference. The commission payment was factored in to the pricing. So, taking the fee initially from the pot will reduce it compared to factoring but not by enough that most people will notice.

  6. People believe that paying by fee is the cheaper option and they will only choose that route if that proves to be correct. At the moment people can make that choice, however post RDR that choice is removed. This is actually discrimanation against those clients who would prefer us to be remunerated by commission and will ultimately result in clients being worse off.

  7. Hopefully the 1:26pm contributor is better working the numbers than the grammar and spelling – 5 mistakes in such a short contribution is a pretty poor!

  8. The RDR won’t help with the take up of OMO’s.
    I don’t understand why commission is payable if the annuity is sold without advice? Can someone explain please?
    The FSA RDR consultation papers don’t seem to mention annuities at all.
    I would have thought that this is a regulated activity and comes under the RDR commission ban AND the higher qualifications requirement if the client is retail.

  9. A 2005 report by Charles River Associates into the effect of commission commented that perception guided opinion more than reality.

    Consumers have a perception that indpendent advice costs them money even if there is a saving or other benefit as a result of taking the advice.

    Regardless of whether we favour commission or fees there is a consumer-driven perception that commission = free advice and fees = a cost. Therefore it is certain that the RDR will reduce the amount of OMO due to consumer perception.

    Yet again an instance of the consumer suffering detriment due to policies supposedly implemented for their benefit.

    “Ouch, it hurts” shouted the consumer.

    “This is for your own good” replied the FSA.

  10. We charge fees (nominally £125 per policy/scheme) and commission (sometimes reduced, given that it ranges from 1% to as much as 2.25%) for vesting exercises. Anything less simply isn’t commercially viable.

    Most clients are so totally flummoxed and bewildered by the paperwork that they don’t consider a reasonable fee to be unacceptable. And if they do, you just “advise” them to shop around if they think they can find anyone else to to the job properly for less.

    Then again, if the FSA did its job properly and insisted that ALL providers MUST include with their pre-retirement packs a standard format A4 sheet explaining in simple, unambiguous terms the benefits of seeking whole of (open) market advice, then only the lazy or the stupid would just buy an annuity with the host provider or allow themselves to be railroaded towards an annuity with the likes of Prudential or L&G by way of some cosy deal at corporate level.

    The FSA will never do this. Why? Because it would constitute an all but unequivocal statement to the effect that whole of market independent financial advice is best and to do that would upset their cronies at the banks.

    So the mess and muddle and “poor consumer outcomes” continue, despite all the phony hogwash of the RDR.

  11. I think we all assume in the proposed RDR world that the providers will discount the cost of purchasing an annuity by the commission displaced. Call me a cynic, but I believe that providers will enhance admin fees to make the IFA propisition less attractive by trying to keep the annuity business in-house.

  12. Bizarrely, in the dark mists of abotu 3 years ago, I had a client request that he pay a fee for annuity advice on his c. £11k annuity purchase. I picked my old annuity brokerage’s minimum fee (£500), attempting to dissuade him from this foolish course of action as I was happy to just take the bog standard 1% commission but no, he was adamant and so something which would have indirectly cost him £110 actually cost him £500 plus VAT. Proof if any were needed that the general public really dont know whats best for them. And that I clearly do not have a commercial bone in my body.

    What RDR will do to the OMO is hopefully remove some of the “Unlock cassh from your pension!!!!” type brokerages that have sprung up. Decent advice is worth paying for.

  13. The test is where a client asks you to explore the market and the answer is to vest with the host company – and advise appropriately that the client should go directly back to that company, without payment from that provider. Might not happen very often. Have you not applied your time and expertise to arrive at the right answer for the client? Should you be paid for that? Of course, on both counts. WIll the client pay. Well, have you sold the benefit of what you have done in cutting through the complexities of all available options? If yes, then yes, they probably will.

    And I don’t think the perception that advice is free as long as there is commission is consumer driven. The consumer has always taken what the profession has given it and any perceptions, therefore, are industry driven

  14. The economics of charging for to arrange an OMO will not work at the lower end of the market, not because of the advice but because the administration of the relevant insurance companies is so bad the the client will revolt at that point.
    Mr(s) Client – here is my bill covering 1 hour of meeting, I hour of research, one hour for the report, and 4 hours dealing with the insurance companies.
    So advisers will generally stick with the higher end of the market, who are more likely to use DrawDown.
    Until the FSA address the central problem of insurance companies administration with the same vigour they apply against any IFA who has transgressed, the only place for OMO is in the washing machine.

  15. Some sensible comments and some not so sensible. When oh when is the IFA community going to let go of commission and move forward. RDR is coming, commission is going. We need innovative business models to deliver consumers the service they need at a price they will pay. Not the service we currently offer at a higher price than customers will pay.
    The status quo is not an option when will the majority of the IFA community start to look ahead?

  16. I would say that this adheres to the rule of unintended consequences, except that it fits so perfectly into the pattern firmly established by the regulator of making it easy for the largest players to cut out costs, by not needing properly qualified staff giving decent advice, while at the same time removing as much competition as possible.
    In the twenty + years when I advised on and sold pensions I always explained the OMO fully because it was such a strong selling point. The OMO provided a guarantee that clients would either get a good deal from the plan provider or they could take their ‘pot’ elsewhere. While there is always a degree of inertia, which keeps these large providers from being in the top tier for annuities the results of the RDR will be to reduce even further any incentive for providers to offer decent, let alone competitive, terms.
    The FSA, with all it’s hype of being the consumers champion and protector, should see this coming but I suppose that is too much to expect, the ‘modus operandi’ being to come in after the event and then to blame anyone except itself or the large providers. There is no forethought or consideration of the consequences, merely a bureaucrats need to put in systems and controls that the senior personnel will never be there to take responsibility for as they will have moved on. Indeed the concept of responsibility is alien to them and thus creates a culture of ‘Institutional Irresponsibility’.

  17. couple of comments

    anonymous 4:45 – don’t companies pay commission when annuity is taken from original provider? I thought they did, as long as you get involved in the paperwork.

    Glen McKeown – economics are going to be an issue regardless of whether business is on fee or commission basis. What is the commission for an annuity? 1%. For a £10k pot that is £100 commission, is that worth 6 hours work (?!) plus client visit? And if there is an obvious, tangible benefit to client (i.e. more money per month), is it really that hard to charge a fee for advice?

    Isn’t commission on drawdown / income drawdown more like 3%. Not saying this is a factor in putting bigger funds into these contracts, but…….

  18. To Robert at 11.33,
    They may well but why should the client stand this cost when all they have to do is tick a box to say they want that option. The point I was trying to make is that what the adviser should be paid for is the research and expertise in arriving at the right answer, not for executing the answer. As Rob at 10.17 says, that is the service they need and they will pay the correct price.

  19. Clients with smaller pension pots at retirement tend also to be the lower paid who therefore have fewer options (and potential annuity providers) available to them than the wealthier HNW type of client. However, Pensions Simplification has ensured that the paperwork on their retirement is just as horrendous, even when their total pension savings are just over 1% of the Lifetime Allowance. In such a case, every penny of additional income counts even though, in monetary terms, a 30% increase on their pension benefits doesn’t amount to very much. RDR will effectively deprive these clients of advice as advisers switch to prohibitive fee models that they can’t afford and consign them to the dustbin of unprofitability (or segmentation, as I believe it is called nowadays). If Fitch think that shopping around is so easy, they have obviously never looked at the scenario of a small client with health problems and less than £20k pension savings split over 3 policies. Just doing the paperwork is a battle and I’ve never spoken to someone like this who would have been able to track down the best deal, let alone fill in all the forms correctly first time. Commission bias doesn’t affect these clients, but a duty of care for a longstanding customer can ensure that they receive advice at present. In the brave new world, they’ll be on their own.

  20. To Robert Rice – the response to your comment is twofold.
    Firstly, if you complete the transaction with commission there is a tendency to ignore the economics of the transaction – nobody ever said that Advisers were any brighter in this area than their clients. If you have to actually itemise the work done and the reward received then there is a greater likelihood that both adviser and advised will decide that there is no economic benefit in the transaction, especially at the lower purchase sums.
    Secondly, the point was more about the fundamental administrative incompetence of Providers and the incompetence of the FSA in dealing with this matter.
    If everything is to be on a fee basis in future, then there is a strong possibility that those at the lower end of the market will be excluded from advice because of the administration cost created by Providers rather than pure advisory costs.
    That exclusion will arise directly from the FSA wilfully ignoring administration defects.
    Is that Treating Clients Fairly?

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