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The circle game? FSA tells consumers advice under RDR won't cost more.

6 Jun 2011


The way consumers receive investment advice from financial advisers is changing say’s the FSA in a newly released information page on their website. It says they “have been working with firms, advisers, consumer groups and industry experts to improve how investment products and services are recommended to potential investors”. In what proportion one cannot know.

This is the first of many such announcements I am sure, but I think that this one is somewhat disingenuous.

They state that the process of RDR is simply “modernising the way recommendations about investment products, such as ISAs and pensions, are made to investors.

Their aim is to “ensure that consumers can have greater confidence in the advice they are being given, that an adviser will be able to “consider a broader range of products, or clearly state which products they can advise on and “be free from bias towards any one product provider because of how much that provider pays them in commission”.

I think that for the thousands of advisers and provider firms who are directly affected by the changes that RDR will bring, it will not be seen as a “modernisation” of the delivery of financial advice and distribution of products.

It will though have been a catalyst for a seismic change in the distribution of product. The industry has and will see huge spending to ensure firms are RDR compliant at the end of next year, more “business consolidation” and thousands of job losses- past, present and future.

If we park the IFA issue of qualifications as in principle nobody can actually take exception to being better qualified (it is just the way this is being bulldozed through that is contentious for many) we really do need to look at the statement that under RDR, advice “won't cost more”. After all it does not say it will cost less!

For very many years pretty much all IFAs have offered a remuneration model based upon fees or commission or a combination thereof. Additionally, commissions have had to be disclosed in monetary terms for very many years and the amounts paid could not be misunderstood or erased. The difference that RDR brings is that the regulator has removed the option of a mutually acceptable method of remuneration that does not directly incur cost to the consumer.

For many IFAs the reality of their business model, rightly or wrongly, has been that they can earn a lot of money for very little work or very little for lot of work. This position also often includes doing a lot that may result in nothing- the pro bono aspect.

This business style has resulted in many consumers being able to benefit and quite likely for free.

Post RDR the IFA will need to look at “time spent” to be truly fee based as anything else, for example percentages of funds under investment, is really commission by another name, but not paid by the firm who holds the funds.

It is correct that consumers should understand that advice comes at a price but that price and the method of how it is actually paid should be determined by the client and adviser firm together and not a regulator.

Historically, there will no doubt have been occasions when advisers have been influenced by the commission overrides paid.

But, here is the rub. Commissions many years ago were determined by the flat LAUTRO rate and this was not subject to any uplift. This meant that all providers paid the same rate of commission on all products and premiums and so there was no likelihood of bias

What a crazy commercial and regulatory world we live in! Consumers want advice but for the vast majority, non HNW types, there was/is a reluctance to directly pay for it out of their own pocket. Then the regulators and consumer groups got involved. The OFT decided that flat commission rates were anti-competitive and so we saw the arrival of the LAUTRO override and it is this fact that quite perversely has resulted in the view that commission bias was resulting in the consumer suffering.

The OFT was approached recently and asked if it will look at the RDR and the impact it will have on consumers. Where advice by fee is the name of the game and that commissions will disappear. Their response was quite surprising, the OFT said that they cannot investigate what the consumer detriment impact of no commissions post RDR may be because, as it has not happened, they are not empowered to investigate.

So, if post RDR the various consumer interest groups press the OFT to investigate the impact of this brave new world and the findings of an enquiry reach similar conclusions to the anti competitive nature of LAUTRO rates on commissions what will happen?

Yes, you guessed it, commissions would return. And why, because they will find that is anti-competitive to restrict providers from incentivising those who distribute their products.

As Joni Mitchell sang-

“And the seasons they go round and round

And the painted ponies go up and down

We're captive on the carousel of time

We can't return we can only look

Behind from where we came

And go round and round and round

In the circle game”.


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Comments (8)

Virtually every product we buy has an inbuilt commission. Sainsbury's sell Heinz beans and their commission is the mark up between the wholesale cost and the retail cost. The same with cars, clothes and other products.

Consider a property purchase. I want to buy a house for £250,000 but I don't have £250,000. I go to a mortgage lender who provides the capital which I repay over 25 years - a convenience and a cashflow tool.

Consider a pension or life assurance purchase. I approach an adviser who recommends a way forward and a product to solve my problem. He offers an option of paying his £1,000 fee or of having it paid for out of the product by way of the charging structure devised by the provider. This allows me to spread the cost over a number of years and I opt for it.

The FSA now believes that this is bad for me, although for reasons not entirely clear, they also believe that I can continue to buy my protection this way.

As a consumer I have lost a valuable option and I'm not happy with my consumer champion which has reduced my choice, and in the process reduced my choice of financial advice outlets.

Oh, what's that, I can agree a fee and have it paid out my first years contribution? Oh, that's okay then. What's that? The £1,000 fee is going to eat up all of my first years contribution? Well I don't want the pension then, you can stuff it.

Progress? My guess is that this 'idea' will go the same way as Progress from Royal Liver. I give it the same 5 or 6 years.

Alan Lakey   07/06/2011   09:02
The way you receive investment advice from financial advisers is changing. We have been working against firms, advisers, but with consumer groups (despite their complete lack of business expertise or responsibility for their actions) and so called industry “experts” to change this successful industry by charging you directly for advice which up to now has been free for the vast majority of individual investors. You have only paid, as is the case with most other purchases you make when you have actually contracted to buy an investment. We were never actually involved in running this very successful industry which has had a major beneficial effect on the UK economy for many years but we are concerned that people are saving less and less since we regulated the industry on behalf of consumers. As a result of our acting on your behalf (although we never asked you) we feel that more interference by regulation, although statistics show that it has had the opposite effect so far, will make people wish to save more. Here we explain what this muddled thinking means for you..

Frank Dennis   07/06/2011   10:45
Frank, I am confused, can you expand upon this to assist my understanding of the point you have made?

cortesin   07/06/2011   11:03
Have you read the message to consumers on the FSA website ? This is my satirical but serious view of how the first paragraph should read.

My underlying view is that RDR will seriously damage this successful industry and that the message to consumers on the FSA website is not only misleading but is blatant propaganda for their views without any risk warnings of the "unintended" possible consequences of RDR.

Frank Dennis   07/06/2011   13:24
Thanks Frank, the scales have fallen from my eyes. Point well made.

cortesin   07/06/2011   14:26
Actualy the FSA is right. The advice will not cost more but less. I believe advisers will struggle to get their fees out of the clients pockets and they will settle for less. A lot less than before. There is nothing wrong with having an unbundling proposition.

And the comparison with supermarkets is full of flows. Supermarkets exist because there is real competitions so the markups are small and they sell a hell of a lot of stuff. I can't say the same about the financial advice. Financial advice is not about selling stuff (products) but selling knowledge, experience etc. That should be priced separate.

If you go into a Ford showroom you don't expect them to say Mercedes is a better car or they have a promotion this Saturday. You expect to be sold/persuade to buy a Ford there and then. It is not the same with the 'independent' advisor.

From my experience the clients love to discuss the advisor charges and negotiate what they get for it. Not only that they can choose the services are relevant or more important for them but they feel more involved in the whole process.

Edited 1 time(s). Last edit at 15/09/2011 10:06AM by Eugen Neagu.

Eugen Neagu   15/09/2011   10:01
What Eugen fails to realise is that many financial products have to be "sold", ie what is this product going to do for you Mr Client; what the benefits are; how much it is going to cost etc.
When I was the "Man from the Pru" back in the seventies, our training was second to none, we were the family friend, social worker and adviser. Far more people were saving in the short, medium and long term, and far more people had life cover and pensions - all "sold" by their trusted adviser.
As a result of Regulation, whole rafts of communities no longer receive personal financial advice in the home, and hence these people have no savings, no life cover or pension provision.
Yes, we were paid commission on top of salary, but there were many aspects of our general social advice and help that came free of charge.
The RDR will reduce the access to financial advice to the whole public even further, and Independent advisers will only be dealing with HNW clientele. The rest of society will go to the banks and be sold cash ISAs and other products, which may or may not be suitable for them.
The irony of all this is that the "Man from the Pru" happens to be resurrected in China, and the masses out there are receiving the financial advice required.

Brian Hammond   13/10/2011   10:29
A point well made and often overlooked. Historically most financial services products are sold not bought. It is that market that will lose access to advice because they will not see why they should pay to "buy" something they do not want but actually need.

And that is why so many providers and banks are now looking at their own distribution. If the Euro Mifid proposals are as indicated with restricted advice being allowed to retain a commission model, where does that place IFAs? So much for the level laying field.

cortesin   14/10/2011   09:33


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