RDR 2013 Explained
The quality of financial advice is on the rise. This is because professionals in the sector faced the biggest shake-up in the sector’s history – the Retail Distribution Review- which went live on 1 January 2013.
A higher standard of qualification was enforced and all advisers must now subscribe to a code of ethics to ensure fair and honest customer treatment.
All providers of financial products must make clear who gets paid what, by who and why, creating greater transparency and making it easier for clients to control costs.
Consumers can now negotiate an hourly rate, fixed fee, portfolio percentage or stop ongoing adviser charges if they feel they’re not getting value for money.
There’s more clarity on the adviser’s status: ‘independent’ or ‘restricted’ (previously ‘tied’ and ‘multi-tied’), with a clear explanation of the restrictions they work to.
Regulated ‘independent’ advisers provide financial products from the whole of the market. ‘Restricted’ advisers usually sell products for a single company or for a narrower market with less product selection.
Although restricted advisers appear to be disadvantaged, the term also refers to companies offering only the best in the business and actively managing them on their clients’ behalf.
In my experience, this latter approach to investment management brings added value to performance for the medium to long term investor and shouldn’t be dismissed out of hand.
All this is potentially good news for the consumer but there are some myths and misunderstandings worth comment.
It’s been widely reported that commission payments to advisers have been banned to reduce sale bias towards certain products and the risk of mis-selling.
Commission payments do appear to have stopped but many providers have simply changed the term ‘commission’ to ‘fee’ and continue payment to advisers as before.
This has both good and bad effects for the consumer. It’s useful, simple, facilitating and generally tax-efficient to pay your adviser by deduction from your active portfolio of investments.
However, the FSA do not go as far as they intended to in dealing with the product sale bias for consumers unwittingly under the influence of sales driven advisers.
Higher tax and accountancy costs.
HMRC have used this opportunity to further tax investors, in a complex shuffling of adviser charges (or fees) being levied against the 5% allowance\return of capital from investment bonds. These products have been very popular with the retired consumer for over 25 years and this ‘tinkering’ will force many thousands of policyholders into complex accounting procedures (more professional expense), as they unwittingly trip into ‘chargeable events’ (more income tax exposure), or take a 20% reduction in income to avoid them.
Higher cost of advice.
Although the new changes to legislation allow for the negotiation of adviser charges (approx 0.5 % pa of the average 2.2% annual management charges), post RDR product illustrations confirm an increase of 20% (inclusive of adviser charges) on a like for like comparison of pre RDR products.
It’s early days yet, but reports that some fund managers are pocketing the difference when they could be reducing the cost to consumers, are already emerging.
More than ever before, consumers should pay particular attention to the fine detail of product charges or consult a professional on the specifics.
The consumer advice gap.
The FSA announced the RDR proposals in 2006, so there’s been plenty of time for financial service companies to study the effects and reposition themselves.
Banks have recently reduced their mid-range sales forces/advisers, anticipating that many customers will elect to reduce or stop the annual adviser charges. Two excellent reports were produced by Deloitte and BDO, (links are provided below) highlighting the advice gap now facing middle England.
In précis, the high net worth client is currently more profitable but requires more hands-on service delivery, involving advisers in more time-consuming relationships and value-driven recommendations.
Accordingly, the banks have reduced service levels to the middle market to focus on the more profitable upper end, leaving 5.5 million people disenfranchised (or do-it-yourself beginners), as online services are introduced to plug the gap.
An end to cross-subsidy?
Throughout my financial career commencing in 1991, in practice, the higher end of the market cross-subsidised the middle to lower end.
Post RDR the cross-subsidy appears to have gone, leaving the vast majority to fend for themselves with the untold risks of the ‘click and invest’ model.
This brief explanation of RDR and its impact has attempted to bring you a flavour of the key issues since the RDR has come into force.
Round table discussion
To explore the issues arising, Charterbridge sponsored a round table discussion in January with leading South West professionals from Coutts, KPMG, Irwin Mitchell, Barclays Wealth, Foot Anstey, and Crowe Clark Whitehill Financial Planning Ltd., chaired by the editor of the South West Business Insider Magazine and focused on the effects of RDR for the consumer.
The forum can be followed here:
The BDO report is available here:
The Deloitte report is available here: http://www.deloitte.com/view/en_GB/uk/industries/financial-services/issues-trends/retail-distribution-review/d7aec9a7c54da310VgnVCM3000003456f70aRCRD.htm
For further information see the FSA consumer guide: