What makes Tom’s viewpoint relevant and sustainable is that, unlike some observers, he is not seeking to defend a corner or promote vested interests. He operates two advisory companies, one of which provides commission-based advice, with the other fee-only.
When a person of Tom’s acumen stands up and tells the FSA that the model is not broken, his words count far more than the applause and urgings of self-servers who pad their armchairs and seek corporate advancement.
Let us assume that the RDR is not a done deal. There are six weeks to respond so remember the old directsales closer – silence is taken as agreement.
Recently, a headmistress friend opted for early retire-ment. She confided that when she first took the headship, her typical week consisted of a half-day of admin with four-and-a-half days teaching. By the time she retired, the percentages were reversed and she no longer enjoyed it.
Many advisers occupy a similar position with so much time is needlessly spent on compliance, RMAR matters, provision of forests of documentation and ensuring TCF is ingrained within a business and documenting such facts. The time spent with clients is massively reduced from bygone days and this must be to their detriment.
It is not that these areas are not deserving of attention but the tail is wagging the dog and the job is based on the rules rather than the reverse.
In the mid 1990s, my business mix comprised around 60 per cent pension advice/sales, today it is around 8 per cent. Is it because clients no longer require retirement advice or is it because I no longer prospect for pension business? We all know that consumer apathy means products need to be sold and sadly there is no longer a financial incentive to prospect for pensions.
By way of example, I recently spent two hours with an existing client and it was agreed that he should increase his existing Standard Life personal pension by a gross £128 a month. The illustration highlighted that I would only be receiving fund-based commission which would result in first-year revenue of £2.39. The £22.51 which may be paid in year 10 is equally risible.
Some will argue that the client should be charged a fee and that is an option but how might this work in practice when searching out potential pension clients? Previously, I may have written a letter suggesting that my self-employed client drop by to discuss retirement planning but this will not work today if it carries the sting that a twohour meeting will cost him £250. Clients value financial advice but they will willingly part with cash to get a good value pension plan. Experience confirms that they prefer the cost to be built into such plans. Customer-agreed remuneration is not likely to help where a review indicates the ability to fund a modest contribution increase and this shows the imperfection of the RDR suggestions.
The wealthy can use CAR because they are not only willing and able to pay fees but the level of contributions also allows a value-for-money transaction. Low contributions cannot realistically allow a true fee by way of commission offset so advisers are denied realistic access to these clients and clients are denied access to independent advice.
Under the RDR plans, this will be one of the outcomes and unless it is the FSA’s intention, it will become one of the many unintended consequences.
When pension plan structures are revised, enabling me to prospect for clients and be paid for my success, I will recommence this activity. I am sure I speak for the majority of advisers in suggesting that, until such a time comes, the retirement gap will continue to grow.
What should the RDR have simplicity is the key. Products solve problems and advisers require financial recompense. This can be achieved by rescinding the foolishness of depolarisation so there are only two types of advice – independent and non-independent. All products should include a built-in marketing allowance enabling commission payment or offset. This incentivises all advisers to prospect and in so doing reduce the various financial gaps. The regulator needs to reduce the burden of regulation and consumer paraphernalia and by doing its regulatory duties effectively will ensure that misadvice is stamped outBy enabling tied-advice and independent advice (whether fee-only or otherwise), the financial sector will be readied for its job of providing competition and of protecting the interests of consumers.
Alan Lakey is a partner at Highclere Financial Services