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RDR has pushed up cost of advice

Advisers have used the RDR to increase the cost of advice despite lower product charges, research suggests.

Research commissioned by the FCA, published today as part of its initial post-RDR implementation review, has found the impact of the reforms on the total cost of investment remains unclear.

The research, carried out by Europe Economics, found evidence that product charges have fallen over the last two years.

But the report says: “There is evidence that adviser charges have increased in some cases (certainly,there is no notable evidence to suggest that these have fallen), and lower product charges may not offset this.

“There is also the possibility that some advisers are channelling more of their clients’ portfolios to lower-charging (i.e. passive) funds in order to keep total costs to clients low, rather than reducing their own charges.”

However, Europe Economics also says advisers are increasingly competing on ongoing service to justify the adviser charge.

It says: “Overall, the continued weak ability of advised consumers to assess costs and the quality of advice means advisers still face limited competitive pressure on price and, as a result, appear to be offering adviser charges in line with or greater than the commission they received pre-RDR.

“There is scope for consumers to pick poor proxies for the underlying quality of the investment service received. Given the observed change in product mix, changes in competition also appear to have led to changes in advice and product recommendations, but at this stage it is too early to assess whether this has driven any improvement in the quality of advice.”

Post-RDR charges table.jpg
Based on an investment of £10,000 for equity funds or Isas

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Comments

There are 19 comments at the moment, we would love to hear your opinion too.

  1. “Advisers have used the RDR to increase the cost of advice despite lower product charges,”

    Natalie I am very disappointed by your shamefully misleading opening sentence. The truth is RDR imposed huge cost increases on advisers who were in turn forced to increase their prices simply to stay in business. RDR was not a commercial opportunity. Oh and by the way FSA was told this would happen before implementation – but they ignored it/ did not care

  2. Interesting but has advice charges gone up for all or just those with small amounts to invest. Before RDR those with larger amounts subsides those with lower amounts. It was distribution of wealth!!!

  3. O and BTW “…despite lower product charges”

    Why should there be any correlation between advice charges and product charges? as clearly implied by the same sentence. The whole point of RDR was to separate them out.

  4. I think this is half right.

    The cost of advice has increased not only due to RDR but to the ever increasing costs of regulation in general and the inflation in fines and sanctions.

    Any decent business is going to cost in all the levies and make provision for the possibility of paying extra levies and fines. Regulation is now rather uncertain and a business never knows with any certainty whether it will get zapped.

    We now have to pay for such things as MAS, extra imposts from the FSCS, blackmail via blanket actions – such as Key Data.

    In case it has escaped attention we are in business to make a profit. We have been told in the past by the regulator that our business model was not sustainable. Many of us took that on board and made an effort to ensure that it was – only now to be criticised again. You can’t have it both ways. Professional service comes at a price and compared to other professions our charges still have a long way to catch up. We are also rather more heavily regulated than most and carry greater risk through that regulation – so taking that on board I would say that I charges are still far too low.

  5. Could not agree more with Simons comment, this is a shameful headline comment.

    When additional costs are loaded on to any sort of company and they have no control over them the only way to stay in business is increase charges. IFA’s are no different to supermarkets or your local garage.

    As for the FCA saying “it has found the impact of the reforms on the total cost of investment remains unclear”. Pretty clear from where I stand, Investment companies have not reduced their charges, in defence they have had to pay millions due to RDR, while advisers only have one source of income to meet the increased costs.

    As Simon pointed out the FSA was told this many years ago.

    Yes IFA charges may have increased, but the RDR was not an excuse, it was the driver.

  6. What folks are also missing Harry is that increased costs are being shared amongst smaller numbers of advisers.

  7. You can charge what people will pay, no more.

    Is this a survey which is based on the hypothetical charging structures laid-out in firms disclosure documents or is it based on what people have ‘actually’ been taking/charging on cases?

    For my part, the theory behind what we want, or purport, to charge under RDR and the practice of what a client wants and is willing to pay, are quite often rather different.

  8. Back in 2009-11 period Adviser Alliance made the point to the regulator that the RDR would have numerous negative consequences and that it was ill-thought out and most likely would be scrapped (or adjusted and refined, in reguspeak).

    This wise counsel failed to engender change because the committee-monkeys saw a way forward that was vital and far-reaching and would enable them to fly away to loftier perches before the damage became fully evident.

  9. If this survey is as described then it fails on a number of levels. The most critical of which is that it is a snapshot. Particularly around product charges there have been regular changes (mainly reductions) for many many years, and to simply attribute the most recent round of product charge reductions to RDR without taking into account the general direction of travel from improvements in technologies, process, efficiencies of scale and so on is disingenuous.

    I’d quite like to know whether the rate of change in product charges is greater or reduced as a result of RDR, but simply knowing that the absolute level of charges has reduced is rubbish.

    The same issue applies to the cost of advice of course, and correlation does not equal causation so it would be nice to see some studies which try to identify causation.

    However I suppose if you are trying to prove something wasn’t a god awful mistake it’s best not to delve too deep with any sort of reasonable methodology because science can be rough like that – it can deliver the truth when what you want is spin.

  10. RDR = increased costs, RDR review fails to find any consumer benefits, and RDR is still confusing the hell out of the FCA, consumer and the industry !!

    The big pile of poo in the corner left by the big white RDR elephant, is starting to smell rather bad, best Mr Wheatly puts on his overalls and wellies, gets a big shovel and clear up this “2 billion” mess !!

  11. Could not agree more with Simons comment, this is a shameful headline comment.

    When additional costs are loaded on to any sort of company and they have no control over them the only way to stay in business is increase charges. IFA’s are no different to supermarkets or your local garage.

    As for the FCA saying “it has found the impact of the reforms on the total cost of investment remains unclear”. Pretty clear from where I stand, Investment companies have not reduced their charges, in defence they have had to pay millions due to RDR, while advisers only have one source of income to meet the increased costs.

    As Simon pointed out the FSA was told this many years ago.

    Yes IFA charges may have increased, but the RDR was not an excuse, it was the driver.

  12. Pre RDR I always took initial plus trail for every investment, regardless of provider. It was 3 + 0.5 so a £10k would earn me £300 initial. Post RDR having become more qualified, more professional have had Regulatory costs imposed, FSCS costs imposed and PII costs imposed. All of which hits my income.
    So Post RDR I charge a 4.5% fee on lump sum and 0.75 on going. However I have an absolute minimum income fee of £645 so if a client does a £10k investment now it costs them 6.45% plus higher ongoing. I have had clients do this and I have had people walk away. Regardless, the RDR has been a hugely expensive catastrophe for clients, advisers and providers. The FCA say it has been a success in term of professionalism, qualifications, and transparency. They could have achieved all of this without the turmoil the have created by insisting on the quail’s which leads to perceived professionalism and the transparency could have been achieved via client agreed remuneration on a single A4 sheet showing. No messing around with an entire industry at huge expense to everyone. The FSA was incompetently run by (no doubt very) well qualified people who knew absolutely nothing about the industry they were regulating and the effect it would have. This was in spite of being told that all of the consequences (they have now found have happened) would indeed happen. The lunatics really have taken over the asylum

  13. SHOCK !!!!!!!!!!!

  14. Natalie. Regulatory fees and PII costs are only going one way. Adviser numbers in the opposite direction.So it is a case of simple maths. Fewer advisers + greater regulatory fees = higher adviser charges. Product fees are irrelevant in the argument. They are what they are. Unless of course you’re talking AMC, TER or OCF or whatever is next chosen to be the best definition of fund charges.

  15. C’mon everybody. There is absolutely no surprises here. This was a review “commissioned”/ paid for by the FCA to make sure no blame could be apportioned in their direction while once again seizing the opportunity to throw some more mud about.

    I have met some playground bullies in my time and the FCA is full of them.

  16. how do you price in keeping files & PI to defend yourself to infinity? Although the F-pack removed the longstop in 2001 without consultation and contrary to the stated intention in CP33 etc, any adviser who had NOT had a complaint or did not know of IFADU or Adviser Alliance would probably only have started to find this out until just before RDR, so this is also an effect of removal of the longstop which will influence advice pricing, especially for smaller value cases for Network members where the 25 free cases don’t work.
    The FSA and the TSC were warned of all this by AA and indivuals too, but while the TSC took note and advised a delay, the FSA chose to plough ahead.
    Now the FCA want us to explain to them the difference between Independent and Restricted!
    It is simple, you sit in front of an IFA and he has an open mind. you sit in front of a restricted adviser and there is something they have chosen NOT to do even before you speak and it is their responsibility to explain those restrictions.
    I suspect the business I write is very similar to both my friend Alan Lakeys and also/Harry Katz, the difference is when the FCA said we must consider UCIS, EIS, VCT etc to remain IFA, some chose not to consider while some said I will consider, BUT they are unlikely to be suitable for the majority of my clients. The changes in pensions do however mean EIS & VCT are becoming more of a consideration, so my CPD here is increasing, which is yet another cost increase.

  17. RDR moved the market away from servicing the whole market to one where it just services the wealthy. It’s obvious that the average fees after that would rise as the market no longer serves the less well of. I suspect they know that but are still trying not to admit it.

  18. Advisers and consumers…Bottom of the consultation pile but yet paying everyone else’s wages!

    Still, Pa knows best!

  19. misleading and ill-informed

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