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The good, the bad and the ugly: Has the RDR measured up to the hype?

The FCA is set to undertake further work on charges disclosure and the independent and restricted advice labels after publishing the third and final cycle of its post-RDR thematic review.

While the FCA has praised the industry for making good progress, it has set out a number of areas of concern, including disclosure of costs and the suitability of ongoing services.

The good

The FCA says the findings of its third thematic review on adviser charging provide “further evidence of the increasing professionalism of the financial advice sector”.

It says it found a “material improvement” in the way firms disclose the cost of their advice, their scope of service, and the nature of their services to clients.

The regulator says this suggests firms have responded positively to the findings of the second cycle of the review in April, which warned many advisers were not providing clear information on the costs of their services in what it described as a “wake-up call” to the industry.

More widely, the FCA says there are “encouraging signs” the RDR is on track to achieve its objectives.

It points to reduced product bias, with a decline in sales of products which paid higher commission pre-RDR, and an increase in the number of advisers obtaining qualifications which go beyond the minimum requirements.

The Personal Finance Society says 4,300 advisers have achieved chartered status, with a further 7,500 individuals working towards the qualification.

PFS chief executive Keith Richards says: “There is clear evidence of the progress being made by the advice profession. This review is consistent with key messages coming from Canary Wharf recently that professionalism is evident and the sector continues to respond positively to reforms.”

EY senior adviser Malcolm Kerr adds: “It will not be long until the majority of investment advisers have achieved chartered status. The industry deserves a big tick for professionalism.”

The FCA also praised the industry’s greater focus on providing ongoing services, and notes that consumer research carried out by NMG shows the importance customers place in the ongoing element of advice.

The bad

However, the FCA says it remains concerned some firms are failing to provide clients with clear disclosure of their ongoing charges in cash terms.

The review found 35 per cent of firms did not disclose the total adviser charge for their ongoing services in cash terms relevant to the individual client, compared to 41 per cent in cycle two. This normally applies when the firm is using a percentage-based charging structure.

The FCA says: “As this was one of the main failings in both of the previous review cycles, we are disappointed a significant proportion of firms continue to fail to disclose the ongoing adviser charge in cash terms for individual clients.”

It also found that of the firms using hourly rates within their charging structure, 57 per cent did not give an estimate of how long each service was likely to take, compared to 73 per cent in cycle two.

The review also found 23 per cent of firms use wide ranges in their generic disclosure, for instance, stating that they charge between £X and £Y for a financial planning report.

The FCA says where there is a lack of clarity it can be difficult for the client to be clear about the likely cost.

Research carried out by Europe Economics and published as part of the review also raised concerns that poor disclosure may be preventing consumers from shopping around.

Europe Economics says: “The complexity of charging structures and the manner in which this information is communicated may increase consumer search costs and limit the effectiveness with which consumers engage with the market.

“One implication of this is consumers are less likely to be able to shop around effectively for an adviser and in doing so drive down competition between advisers.”

But Institute of Financial Planning chief executive Steve Gazzard says cost disclosure “is not as simple as the FCA would like”.

He says: “The FCA thinks in terms of product, and at face value a cost to advise on setting up an Isa might be relatively simple to calculate and disclose. However, most of our members work on a more holistic basis and it is far more difficult to calculate the costs of this until after the first meeting with the client.

“If the market is reduced to competing on fees it will be the cheaper and weaker service offerings that may take the majority of business which would not be a great outcome.”

Speaking to Money Marketing,  FCA director of long-term savings and pensions Nick Poyntz-Wright says: “A number of firms provide an hourly rate, which is something you could potentially compare between different firms.

“But consumers have very little idea how long a particular piece of work is going to take, so the adviser is not thinking about how to put this in a way the client is able to understand how much they are likely to pay. Sometimes it is not until the end of a piece of work they find out how much the total cost is. The adviser is then building up risk because there is a misalignment of expectations.”

The thematic review also identified issues with some firms’ ongoing service offerings, finding some services were not sufficiently linked to customers’ needs. It found in a small minority of firms, one of the ongoing service levels offered to clients only included administrative duties linked to the initial advice and the maintenance of client records.

The FCA says: “We were concerned these tasks did not constitute a genuine ongoing service and firms were therefore failing to treat these clients fairly.”

Of further concern is a suggestion by Europe Economics that advisers have used the RDR to increase the cost of advice despite lower product charges.

The research found that product charges have fallen over the last two years, but says the impact of the RDR on the total cost of investment remains unclear.

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 channeling more of their clients’ portfolios to lower-charging (that is, passive) funds in order to keep total costs to clients low, rather than reducing their own charges.”

But Clarke Robinson & Co managing director Steven Robinson argues: “The RDR has increased the cost of business to advisers. They have to either pass the cost of that on to clients, or absorb it themselves.”

The ugly

One advice firm has been referred to enforcement action as a result of the review, with the FCA saying the firm has not “sufficiently engaged with the changes the RDR requires”. The firm’s failings relate to disclosure and ongoing services.

The regulator also singled out wealth managers for particular criticism.

It says too many wealth management firms operating on a percentage charging basis are failing to provide examples in cash terms in their generic charging structures.

The industry-wide failings in this area are 15 per cent for initial charges and 18 per cent for ongoing charges, but the equivalent figures for wealth management firms are 36 per cent and 50 per cent respectively.

The industry can also expect further scrutiny from the regulator over the coming years.

FCA head of investment David Geale says: “The RDR was a generational change and we are only two years in, so it is early days. This is the first stage of the post-implementation review and there are encouraging signs but some areas where we need to do further work.”

The FCA says it will look at improving disclosure to consumers early next year, and will undertake a further review of how effective the RDR has been in 2017.

Chief executive Martin Wheatley says: “It is vital we continue to keep these wide-ranging reforms under review.”

The FCA’s work next year will include looking at how behavioural economics can improve consumers’ understanding of the cost of advice, and a consultation on the independent and restricted advice labels.

The FCA has conceded consumer understanding of the labels is “limited” and they are unlikely to have the desired effect.

It is asking for stakeholders’ views on better ways to present information to consumers on the nature of advice services. One idea is to develop a proposal put forward by the Smaller Business panel to introduce a “simple label” that explains the scope of the firm’s advice.

The Europe Economics research found a lack of understanding of the labels by consumers could prompt more advisers to go restricted, suggesting consumers will be worse off as a result. 

It says: “A lack of appreciation by consumers for the services provided by independent advisers may undermine the incentives of these advisers to improve the quality of their advice, or else increase the attraction of the restricted model to them.”

Adviser views 

lewis

Trystan Lewis
Chartered financial planner
Griffin Wealth Management

There remains a lack of consumer awareness over independent and restricted advisers, which is unfortunate because the FCA introduced the terminology to help consumers choose. I am surprised levels of disclosure are still so poor in some areas; in the world of transparent structures, we should be disclosing everything.

fura

Stefan Fura
Director
Furnley House

The RDR has been beneficial to us as a firm and to clients. I don’t think there’s necessarily anything wrong with an increase in charges, as the FCA is surely not expecting us to turn into charities. But there is a question over whether consumers are getting more value than before to reflect the higher charges.

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. RDR has made advisers more qualified. It has brought down amc;s and yes it has made advice charges more because of all the added expense associated with it. The main problem has been that RDR has meant that a great many consumers cannot get advice either because they cannot afford to pay a fee up front or the amounts they have to invest is too small for an adviser to get a decent return to cover the added no long stop risk

  2. ““A lack of appreciation by consumers for the services provided by independent advisers may undermine the incentives of these advisers to improve the quality of their advice, or else increase the attraction of the restricted model to them”. Exactly. When I explain to clients the advice process and what I have to do to document it, even as a (selectively) restricted adviser, a common reaction, particularly from those who’ve been with me for many years, is (with a weary sigh) “Uuuuh, we just don’t want all that”. But I have to tell them that I’m permitted no choice in the matter.

    The regulator continues to kick around the idea of a simplified/streamlined advice process (how long has it been now?) but, when all is said and done, it just CANNOT bring itself to facilitate a framework as straightforward as Proposition, Costs, Risks and Tax with a brief summary of suitability. In the real world (a place quite different from the one inhabited by the regulator), that’s all that most clients actually want.

    Rory Percival says he’d like to see shorter suitability reports but remains silent on just what we might safely leave out, whilst the CMC’s remain as rapacious (and unscrupulous) as ever and we continue to be denied any longstop. So what are we to do?

    As for “the FCA is surely not expecting us to turn into charities”?, isn’t constantly demanding that we do more and more for less and less, whilst charging us ever more for the privilege, pretty much exactly such an expectation?

    Martin Wheatley says: “It is vital we continue to keep these wide-ranging reforms under review.” For which read “continue to justify our existence by forever identifying yet more points of detail with which to find fault and over which to wield our big knobbly stick”. Meanwhile, there seems to be no end in sight to the succession of large scale motorway pile-ups that the FCA should see coming but so often fails to.

  3. I ran into an old IFA friend the other day. Not seen him in over 10 years. We passed the normal pleasantries and asked how each others business were going.

    If I could summarise the comments on all the changes over the last few years it was this:

    Business is really good and growing
    Pension flexibility is a god send as nobody knows what they are doing (just read the media blogs)
    There is no competition to our services as IFAs
    The tick box mentality has gone off the chart with RDR
    We would be surprised if a client ever read the support info such as reports, compliance info and quotations we provide – too complex and repetitive.
    Fees to clients have gone up as a result of the demand supply changing
    Charging fees has changed clients attitudes in now they expect to pay fees to see an adviser
    The complex rules have lead directly to the number of dodgy financial scams and cold calling has gone off the chart.(and growing)
    The real winners with RDR is the regulator and the compliance depts
    Our clients are collateral damage in the changes
    The average person in the UK is now lost and left out of the advice process unless they have cash to pay upfront.

    In all I like the changes but not for the reasons the FCA feel are beneficial. I can now see a real gap in advice and it is getting a lot wider. However who am I – I only work at the coalface with normal joe public.

  4. Martin Wheatley states “The FCA’s work next year will include looking at how behavioural economics can improve consumers’ understanding of the cost of advice, and a consultation on the independent and restricted advice labels.”
    So what is he proposing? Mandatory “O levels” in Financial Planning for consumers. I have been in the industry for almost 30 years and the one thing I have learnt (in life too) is that however desperately you want someone to understand and get a full grasp of how something works , in other words to try and educate them on a subject that would tends to put most people to sleep after 5 minutes of explaining rules and regulations, it won’t work.. however hard you try. Brainwashing perhaps..it works in the DPRK
    That is the same problem with with any subject matter whether financial or anything else.. Everyone’s understanding threshold has limits. I go dragster racing using high powered engines and I could bore most people to death with it…. my partner comes along but has no real understanding of the mechanics of how it all works.. She just sees the end result when you roar up the dragstrip as fast as you can.
    Maybe in the future.. Genetic engineering may be possible whereby you can implant the correct genes to allow for an individual to have a complete grasp of financial planning in life.
    I love what I do, probably in the same way, a dentist loves what they do. And yes I do give a thorough explanation to my clients (peppered with some humour to make it bearable and interesting) to make sure they get a level of understanding.. but how far can you expect them to stay with you is debatable.. But in truth all business relationship within our sector exists on one factor and one factor only… TRUST…..everything else (even cost – to the client) is embellishment. Quality clients don’t go for something just because it’s cheaper…otherwise Waitrose wouldn’t exist.

  5. I really can’t understand the argument that the RDR has now meant some people won’t pay for advice. If they don’t want to pay the fees then they either don’t need the advice or we haven’t been clear in explaining the benefits of paying for it.

    Secondly they always paid for it in the past, the only difference now is that they can clearly see how much they are paying.

    Thirdly the other argument I hear is that well-off clients subsidised less well-off clients under the commission structure – How is that acceptable! In what world would you tell a client that they are paying above and beyond the value of your service because it allows you to offer advice to people with smaller investments!?

    If they genuinely can’t afford advice (because they only have 10k for example) then they don’t need advice. They can do it themselves quite easily. If they can’t then they will pay.

  6. Frustrastingly on disclosure I really don’t think the overwhelming majority of firms aims, are out of kilter with what clients (nor at the end of the day, one key objective of the regulator) actually want. That is “no last minute surprises on costs” – clients should be well aware in advance of how financially painful it’s going to be. No firm wants clients querying unexpected bills and most go to lengths to ensure these are properly explained and agreed beforehand with the client.

    Trouble is, setting everything out without knowing anything about the problem is complex. Mr Simple who has a grand in his GPP and fifty quid in the bank, is going to be a reasonably quick cheap job. Ms Complex with sixteen different pensions, two million in various interesting investments and looking to retire abroad ensuring as much of her estate as is legitimately possible doesn’t pass to HMRC, isn’t.

    And varying multitudes in between. I suppose one could list as many circumstances as one could possibly think of, but exactly how long do you want a client agreement to end up. Most presently run to several pages as it is, leaving clients already baffled, let alone another couple of pages listing ninety six permutatons of reports. And exacly how a client will trawl through all such permutations to work out for themselves, which of the ninety six variations might relflect their own circumstances, escapes me.

    Agreed there are some fairly straightforward issues such as arranging a stakeholder pension, an ISA etc for which cost examples can be reasonably simply set out. But there are many, many more which “simply” can’t.

  7. I ran into an old IFA friend the other day. Not seen him in over 10 years. We passed the normal pleasantries and asked how each others business were going.

    If I could summarise the comments on all the changes over the last few years it was this:

    Business is really good and growing
    Pension flexibility is a god send as nobody knows what they are doing (just read the media blogs)
    There is no competition to our services as IFAs
    The tick box mentality has gone off the chart with RDR
    We would be surprised if a client ever read the support info such as reports, compliance info and quotations we provide – too complex and repetitive.
    Fees to clients have gone up as a result of the demand supply changing
    Charging fees has changed clients attitudes in now they expect to pay fees to see an adviser
    The complex rules have lead directly to the number of dodgy financial scams and cold calling has gone off the chart.(and growing)
    The real winners with RDR is the regulator and the compliance depts
    Our clients are collateral damage in the changes
    The average person in the UK is now lost and left out of the advice process unless they have cash to pay upfront.

    In all I like the changes but not for the reasons the FCA feel are beneficial. I can now see a real gap in advice and it is getting a lot wider. However who am I – I only work at the coalface with normal joe public.

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