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The RDR debate

The FSA’s original retail distribution review discussion paper was a step in the right direction. The FSA focused, rightly, on adviser remuneration and raising professional standards.

The interim report, however, represents a step backwards.

The main problem is the proposal that only whole of market advisers should be able to be able to offer financial advice. This proposal fails to recognise that financial advice can be delivered to a high standard both by IFAs and by tied or multi-tied advisers.

To explore this further, we need to define advice. What does advice mean in the FSA’s eyes and what is good advice?

The FSA has not defined advice for the purposes of the RDR. Checking the FSA handbook, the closest we get is advice “on the merits of buying or sellinga security or relevant investment.”

Unfortunately, this definition is too narrow to do justice to the role of many financial advisers – or the needs of their clients. The failure to define advice means that it is unclear what improvements the FSA seeks.

Advice must often go bey-ond the sale of single products at single points in time. Consumers have broader requirements, needing support around a wide range of financial planning situations. They need help to answer questions such as how much to save, which tax wrappers to use and how to balance risk and reward. Providing this help goes well beyond the compliant selection of a product provider, which is what the FSA seems to have in mind.

Moreover, providing excellent service involves not just producing the right technical outcome but also helping the client feel more engaged and confident about their financial situation. This – together with the delivery of the right outcome – is what good advice really means.

Taking a broader approach to advice, there is no reason why a strong tied or multi-tied offering cannot offer as good a service as whole of market advisers. What is most important is the quality of the support available to the adviser, the tools, training and pay structures to enable them to advise their clients impartially. There is no need to have all the products in the market available.

The FSA is making a black and white distinction between categories of adviser. Is this division is really appropriate?

First, does whole of market do what it says on the tin? The conventional view of whole of market is packaged products from providers who supply the intermediary market. So consumers looking for products from providers which do not work through the IFA channel or who are looking for non-packaged products, will not necessarily find them through whole of market advisers.

There is a danger that placing heavy emphasis on whole of market could mislead consumers about the nature of the service on offer.

Second, does the distinction match the realities of the modern financial world?

In the IFA market, we have seen a narrowing of product choice at point of sale – whether through the use of platforms, panel processes or the use of in-house discretionary investment management services.

On the other hand, tied and multi-tied advisers are increasingly able to offer greater levels of choice and quality through open architecture investment products and flexibility in product sourcing.

So there is growing convergence between the offerings of tied and whole of market advisers. A black and white distinction is clearly not appropriate.

The aim of the retail distribution review was to allow more consumers to have their needs and wants addressed. Preventing tied advisers from providing financial advice would achieve the opposite – reducing needed advisory capacity.

To maximise access to high quality advice, the FSA should concentrate on improving the quality of advice in both the tied and whole of market sector rather than focusing on the theoretical breadth of the product range available.

We urge the FSA to take a broader view of consumers’ need for advice and how the service they receive can be upgraded and made more widely available.

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