6th June 2011

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

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”.

RDR