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Wrapping up the rdr

Our panel assess the Budget and pore over the FSA’s latest updates for the retail distribution review

The panel

Darius McDermott managing director, Chelsea Financial Services
Jason Witcombe director, Evolve Financial Planning
Nick Bamford chief executive, Informed Choice


Was this a disappointing Budget for investors? What measures would you have liked to see included?

McDermott: We welcomed the relaxing of the VCT qualifying rules, we welcomed the indexation of Isa allowance, although I do see that will add complications to the industry from a system point of view, but there was nothing else in there. We would very much like them to return the dividend tax credit to Isas and make the Isa the investment it was when I joined the industry in the 1990s when it was called a Pep.

Witcombe: It was a bit of pointless Budget for investors but I do not think anyone was expecting much to happen because if we have a change of Government it would be undone.

I was pleased there was no tinkering with capital gains tax and that was a bonus. The fact that Isa allowances are going to be increasing with inflation was a useful benefit.

At some stage, and I knew it would never happen in this Budget, I would like to see a complete simplification of pension rules. I would prefer it if we went back to the rules we had before 2006.

Bamford: It was almost the absence of certain things that was positive. There was a fear they might mess around with the rates for capital gains tax to try and close the gap between 18 per cent and the new top rate of 50 per cent, so that was good news. Another thing was the doubling of the rate of entrepreneurial relief for CGT. If you look at both of those areas, they were quite positive.

I was concerned there may be another attack on pensions through getting at people who had carried over protection on their tax-free cash by saying you can still have you 25 per cent tax-free but we will put a monetary ceiling on that.

Among the Budget proposals was a suggestion that the Government will consult over the ability to invest in Aim stocks in an Isa. Would you favour such an approach?

McDermott: Aim liquidity is poor and it really is a high-risk strategy but if investors are sophisticated enough to buy individual stocks, why shouldn’t they access to Aim, the same as other markets, as long as they are aware of the risks?

Witcombe: I am completely indifferent. Apart from our very high-net-worth clients who would be comfortable having a decent proportion of assets in Aim stocks, it is all by the by.

Bamford: With slightly higher risk than the main stocks, it might appeal to some people but I am not leaping up and down getting too carried away by it.

In the latest RDR updates published last week, the FSA stated that advisers should not receive higher levels of income from distributor-influenced funds than they would receive from other competing funds. Will this result in a drop in the number of Difs offered?

McDermott: I would indeed. We could launch a unit trust tomorrow and call it Chelsea growth and appoint a thirdparty manager. Clearly, we would be looking for a considerably larger fee than our 50 basis points. But if I was actually running the money myself and charging 150 basis points, I don’t see there is anything they can do about it.

The idea that companies like Premier can approach IFAs and say, do you want to put your clients in a multi-manager product with us, you brand it yourself and we give you a slightly bigger share of the fee, that clearly looks like it is coming to an end.

Nick Bamford: ’It was almost the absence of certain things that was positive. There was a fear that they might mess around with the rates for capital gains tax’

Witcombe: To an extent yes. It comes down to the definition of whether you are tied, multi-tied or independent. If a firm is claiming to be independent and yet 90 per cent of their business is going into their own funds, then that is not independent. I have got no problem at all with firms selling their own products but I do have a problem with that hap-pening and the consumer getting a truly independent service or believing they are getting a really good deal when actually they may be get-ting fleeced in charges. It is more down to the clarity of service that firms offer and try-ing to help the consumer understand what the choices are.

Bamford: You would like to think not. The reason for those funds is because the IFA was trying to employ a certain degree of expertise and trying to deliver a product that is in the client’s best interest.

The bit that the FSA are looking at are the soft payments that come across from some kind of trade-off with annual management charge with the fund managers. I would put a big tick in the box that said what we seek with out clients is clarity. What the FSA is saying is moving it towards clarity and that is good news.

The FSA made a lot of mention of the use of platforms and wraps, saying that platform-toplatform re-registration could be made compulsory by the end of 2012 and that it could force the unbundling of charges. What is your opinion on these proposed developments?

McDermott: We have campaigned both as Chelsea Financial Services and through the Association of Independent Discount Brokers to have platform-toplatform re-registration. I understand that the systems have not been in place in the past. I understand that prior to the RDR, certainly the platform that we use, was working on this. It can only be to consumer benefit.

On bundling and unbundling, clearly what goes on on platforms has to be consistent with the RDR.

Jason Witcombe: ’Wrap-towrap reregistration would be nice to have but I do not think it is the FSA’s role to force that to happen. It is up to individual firms’

The RDR has said that non-advised sales, where we sit, will have no change and I welcome that. This will mean that we can probably continue on a bundled route, subject to some technicalities.

But unbundling, per se, is consistent with the RDR and I imagine that platforms will want to offer both.

Witcombe: Wrap-to-wrap re-registration would be nice to have but I do not think it is the FSA’s role to force that to happen. To strongly encourage, yes, but to force it to happen I don’t think is fair. It is up to individual firms to decide how they run their businesses.

On the bundling of charges, I think consumers should know who is paying what and who is receiving what. More clarity on that would be thoroughly welcome.

Bamford: Both are positive, big ticks in boxes. You would want the ability to move from either a wrap or platform across to a new one if the new one represents better value to the customer. To disinvest from platform A, transfer cash across to platform B and reinvest must take time and have a risk of being out of the market and be more expensive than a simple re-registration across. I think the regulator has got that spot-on.

The RDR also raised several issues with regard to the use of platforms, including the quality of advice on the use of platforms and using only one wrap. Will this drive a greater use of wrap or act as a brake on their use?

McDermott: From an IFA’s point of view, I imagine this will lead to better segmenting of clients. The more you have got, it may well be you do not want a percentage fee but a flat rate, as 0.3 per cent of £1m is a lot more than 0.3 per cent of £100,000 and it may well be that an IFA has to use multiple platforms because they are guided to do so but it will be in this segmentation.

It may be that investors with portfolios under £100,000 are best placed on platform A but investors with more than £500,000 are on platform C, where a better cost value can be obtained.

Darius McDermott: ’It may be that investors with portfolios under £100,000 are best placed on platform A but investors with more than £500,000 are on platform C, where a better cost value can be obtained’

Witcombe: I am sure there are people using wrap as they should but I am sure there are clients who are finding their charges are being increased rather than decreased through the use of wraps. The whole intention for us is to improve investment choice and reduce charges at the same time. But I can completely understand why the FSA is reviewing it.

In terms of not using just one wrap, we would agree with that. We have a couple of preferred wrap suppliers but our view is that certain wraps work best for certain-sized portfolios and regular savers and large portfolios or portfolios weighted heavily towards pensions assets might suit different wraps.

Bamford: My feeling is that the FSA has been discovering what we feared, that some advisers were just using it as a device for aggregation of assets without thinking through what their business proposition was and have probably become fixated on one particular wrap platform and not thought to consider going back out to the market and looking at the competition.

As long as the wrap platform allows access to the whole of market, funds, ETFs and direct equities, etc, I do not think it is to consumer detriment that an IFA chooses to work with one provider and that is from someone who has made a point of not using just one platform. But it is only fair that IFAs can demonstrate to the regulator that the consumer got a better value service as a result and I am not sure everyone can do that.


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