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Tom Kean: RDR won’t stop poor deals for clients

The recent brouhaha about aggressive tax avoidance is an absolute non-story in the financial world.

We all know there are three types of accountants – ones who are “decent” and go by the book, others who are the polar opposite and fly in the face of the law and the third type being the aggressive tax planner who operates in various shades of grey in the hope that their perfectly legal tax avoidance schemes slip by unnoticed by HMRC into a satisfactory outcome for their clients (who have no doubt signed a very broad waiver expunging the accountant of any potential blame as and when the scheme is outed).

Most of us on the inside know it is a systemic flaw rather than the fault of hard-working comedians.

What this type of coverage does do, however, is give me the chance to remind us all of the other cringing design flaws we all work with. Take commissions v fees, for example.

Despite the howls of protest, we all know that the RDR will come into effect on January 1 next year, with advisers continuing to take whatever level of fee they fancy. We also know that the less morally robust types will readily “explain” their fees to their hapless victims and get them to “agree” it, paid for, up front and out of the product.

The sweeping assumption that fees are somehow morally better than commission was embraced by the RDR policymakers when the whole sorry saga was dreamt up. And before anyone asks me to stop carping on about the RDR, we have been “agreeing” fees for years but like to think we give our clients the full range of options. Predictably, many still prefer to pay via the cunning, interest-free, often tax-relievable “commission” route – which is still available of course.

So am I to believe that once we go through the New Year, people at the FSA will think to themselves that the “commission ban” box has been ticked so we can all forget about that particular evil? Or are they secretly thinking they got something wrong and it has all been a complete waste of time and money as it actually does nothing effective to address over-charging scoundrels?

The unpalatable truth is that nothing will change other than the word commission will be replaced by the word fee.

And to counter the effect of an almost complete cessation of regular-premium business (the backbone of many an IFA’s business model) most are understandably putting in place business structures that charge up to a whole percentage point in “fees” to sit on and “manage” client portfolios. Then there is the wrap fee, product charge, AMC and TER.

I must admit I am personally holding my breath for another charge somewhere or other. I mean, I had never heard of TERs until a couple of years ago.

And finally, we are starting to see banks ditch their whole of market models by rolling out their new and improved service offerings to the unsuspecting public. Trust me, your average Joe Public has no concept of what independent or restricted means to them, so it makes little difference to their mental well-being if either option is put in front of them – banks will dress it up to sound good either way.

Still, that will give the FCA plenty to get their teeth into when they take over the reins.

Tom Kean is director of Thameside Wealth Management


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There are 8 comments at the moment, we would love to hear your opinion too.

  1. Good article and agree with everything. Clients will still pay through the product and it will be at the same (if not higher) rate as before to cover increased costs of staying in business and providing advice. There will also be a big increase towards protection business that will allow advisers to earn commission that way however this will put a big strain on the prvoviders systems as their business levels increase. This too will be more expensive as the cross subsidy from investment business also becomes a no go area. All in all there will be so much detriment that I predict it will be almost incalculable (is that an actual word?) but sure what the hell, the regulator gets its way and to sod the poor consumer who is not going to know what has hit them over next few years (assuming they can find an adviser that is still trading beyond 2013. Good luck everybody

  2. Tom Kean,

    This has got to be one of the worst articles I have read on RDR. It’s quite easy to dismiss RDR and say nothing will change, but the fact is that change was required and RDR (for all its perceived flaws) is a giant step in the right direction.

    Unbundling fees will bring about greater transparency, and doing away with commission based remuneration will help to ensure the right fund/product is recommended; rather not just the ones paying the greatest trail. A separate platform/wrap fee will lead to competitive fee structures and innovation (the UK is miles behind when it comes to platform features). Financial advisers, like other professionals (accountants, lawyers) will be forced to justify their fees and the client will be able to see (through transaction statements at the very least), the amounts being paid to their adviser for ongoing services. Currently this payment is hidden in the AMC and paid out of sight.

    I’m not saying that all RDR initiatives are perfect. There will be teething issues and changes no doubt… but to dismiss RDR as a waste of time is simply ignorant.

  3. Anonymous | 18 Jul 2012 1:39 pm

    You say “Unbundling fees will bring about greater transparency, and doing away with commission based remuneration will help to ensure the right fund/product is recommended; rather not just the ones paying the greatest trail”

    Surely the easiest and most cost effective way to sort any bias was to bring in maximum commission rates across the industry?

    All that RDR has done is made future regular premium business none advisable as no one will be able to justify the cost of selling it if the client has to pay the cost up front.

    For lump sum investments it just means that rather than having an establishment charge spread over a number of years, the cost of advice is taken of the top straight away. At present the client can opt for either option, going forwards they won’t.

  4. I agree that the removal of commission can only have a positive effect for clients, the above article suggests everyone is honest and open, the fact is some are not at having to justify levels of payment will allow the client to judge value.

  5. Agreed with previous “Anonymous” post; Tom you’ve missed the point!
    Different providers offered varying level of commission which “may” have led to product bias based on “what’s in it for the advisor” rather than “what’s the best product for my client”.
    This is being addresses with the idea of “fees” paid by the client directly rather than having providers handing over chunks of the initial investment which vary in size from provider to provider.

  6. To Anonymous 1.39. If you are an IFA – do you not inform your clients of trail commission as well as initial ?? – and if you are not an IFA – you obviously are ignorant of the commission disclosure rules and practice. I have often wondered how “lack of transparency” became a justification for removing commission as a choice for clients and a reason for RDR. It would appear that there are those who just do not know how we operate or who prefer to ignore the facts if they interfere with their own blinkered views of “consumer protection”

  7. Went to see a new client the other day, a referral so didnt know what to find. She showed me a list of recommendations an IFA had put together for her son who had a trust fund that was set up for him after a car crash. The IFA had recommended some deposit accounts (good) a regular payment into a personal pension (very bad) and a lump sum investment into a fund that included the far east, tech funds etc, even though it was made clear that the attitude to risk was very cautious (even worse). This was from a large, pretty well known firm that were charging the client over £3000 for the advice. Sure yes the charge was clear but the advice was pants. RDR is a waste of money as nothing will change as long as there are vulnerable people and sharks looking for them.

  8. As usual Tom get to the heart of the matter and cuts away the tosh that, regulators in particular, use to gloss over their design inadequacies.

    If there are advisers screwing their clients or breaching rules then the answer is to find and get rid of them. Don’t inflict the adviser community and their clients with the full scale horror of regulatory ineptitude.

    Let’s imagine this dismal thinking being applied to other industries.

    Shoplifting is on the increase so we’ll ban cash transactions. More motorists are speeding so we’ll insist on the use of bicycles.

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