By the mass market, I refer to the number of clients who are currently advised by IFAs. Albeit in minority, relative to the total population, this number still runs into millions of people who have used an IFA at one point or another in recent years.
The confusions inherent in the RDR in relation to remuneration and what may constitute general independent advice are well known. Some IFAs, albeit more quietly, have also commented to me that the requirements for much higher qualification standards may lead to a significant number of advisers preferring to leave the industry rather than subject themselves to the new rules.
Is this a problem? Will consumers miss today’s version of independent advice? I guess the answer boils down to whether those who have used it have genuinely benefited from their interaction with IFAs.
Clearly, this is almost certainly the case at the top end of the market. Affluent clients prepared to pay for serious financial planning from high quality IFAs do benefit from their relationship with independent advisers. As a group, these people are unlikely to be affected by the changes proposed in the RDR. Their advisers are most likely to step up to the plate in terms of meeting whatever stringent criteria may be applied when the FSA introduces its new retail distribution rules.
However, that is not really the issue. What we are talking about is the much larger group of people who have interacted with IFAs over the years, perhaps on an occasional basis, and bought financial products through them. Have they genuinely benefited?
Most IFAs would argue that this is indeed the case. The independent designation clearly brings clients into their offices and the ability to recommend products across the whole market is an advantage to many people.
Yet, according to the FSA, the issue is not as clear as that – certainly judging by comments made by the regulator’s head of retail distribution review Amanda Bowe who was quoted in Money Marketing last week as saying “if the number of IFAs falls, the gap can be filled by primary advisers no longer restrained by price caps”.
Bowe apparently claimed the RDR was not a threat to what she described as the full market for advice and said it may well increase that market. On primary advice, she said: “It may not represent the most suitable advice or products but it must not result in unsuitable advice or products.”
My concern is that the issue is not as simple as that. As Investment Management Association chief executive Richard Saunders pointed out recently, the problem is two-fold. First, primary advice has been tried before in conjunction with stakeholder products with the Sandler regime. It failed.
Now the FSA is looking to achieve much the same thing but without a price cap. Here Saunders poses his second question. What is a simple product? As he points out, investment is not simple and all forms come with their own risks.
Even a simple product can be missold. In other words, a financial need may be simple to explain, easy to assess and the product also may be easy to explain but what about its risks? How do you create the appropriate portfolio of pensions and other investments for clients on the basis of script-based primary advice?
Another related issue that concerns me is that of the independent adviser base itself. For example, I can foresee a situation where if new rules came into force that reflected the current RDR proposals, it might leave many IFAs unaffected in terms of their existing relationship with clients, regardless of whether they decide no longer to retain that particular designation.
One IFA I spoke to recently put it graphically: “I could call myself Donald Duck and most of my clients would stick with me. Many have been with me for 10, even 20 years and they know exactly what I have achieved for them.”
But would new clients faced with a choice of a small-time primary adviser or a big bank offering the same level of advice and, seemingly, far bigger resources, be willing to seek out someone who can no longer call him or herself an IFA? Or, to use my IFA’s earlier analogy, would a new client be happier to visit an HSBC branch or Donald Duck’s office above the local chippy?
My guess is that in its current form, the RDR will not usher in an immediate change in behaviour on the part of clients of IFAs. Both they and their advisers will by and large continue to interact in the same manner for years.
However, the change will be a generational one, where tomorrow’s potential influx of clients simply will not materialise to the same extent as today’s.
For the FSA to glibly say “primary advice will fill the gap” does not cut it, in my view.
Nic Cicutti is the editor of moneysupermarket.com. He can be contacted at firstname.lastname@example.org