Daniel Harrison, Senior Partner at True Potential LLP, explains what the regulations in the Retail Distribution Review (RDR) now mean for the investing public and independent financial advisers since the legislation was enacted at the beginning of the year.
What is the main aim of the RDR?
The RDR’s aim was to bring transparency to the relationship between the investing public, their independent financial advisers and the financial product providers. The regulations were drawn up by the FSA and came into action on 1st January this year. The biggest change brought by the rules is that investors now have to pay their IFA for the advice they receive, either upfront or through a visible commission on the investment. Previously, this advice was seen as ‘free’, but the actual fee was bound up in the investment. The RDR has simply formalised the relationship between adviser and client. Additionally, product providers can no longer pay a marketing allowance to IFAs for their products. The aim here was to remove a perceived conflict of interest in that IFAs might promote one product over another because of the allowance they receive.
Does True Potential welcome the legislation?
On the whole, yes – we welcome anything which improves the transparency between financial adviser and client and identifies how much the service costs. For the first time ever really, clients need to be shown the explicit cost of the investment they are considering – so how much will it cost to invest on the platform and how much they are paying for the advice.
It’s worth noting though that if IFAs have been acting correctly for the last two or three years, those charges will have been explicit to their customers anyway – it’s just been formalised now.
How do you expect the investment landscape to change?
Probably one of the really big changes is going to be in the fund supermarkets and the traditional product providers who typically bundled all their costs together. It’s precisely that sort of practice the RDR aims to stop and give some insulation to the client. The problem in that sector of the market was that it was very difficult for the end client to see how much the investment cost. There might be an impact here in people turning away from using these services.
Are there any drawbacks to the RDR?
One disadvantage of the RDR could be that it exacerbates the UK savings gap. There isn’t an engrained culture of saving here and people don’t generally wake up in the morning and think ‘I need to save some money today’. One of the things that financial advisers have been doing well for a very long time is actually educating individuals about the importance of saving and meeting their financial needs. Now though, IFAs will see increased administration, compliance and reporting requirements placing an ever greater burden on their time. Perhaps an unintended consequence of that will be that IFAs will simply have less time to spend advising their existing clients and developing new relationships, despite being more qualified than before.
Furthermore, a report by Deloitte estimated that 5.5m potential investors might find themselves disenfranchised and unwilling to seek financial advice.
Whose role is it to educate the consumers about financial advice?
Part of that has to come through the FSA. It already runs the Money Advice Service through a levy on the industry to ensure there is a free unbiased advice service for the general public. However I struggle to see how that service can offer the depth and detail that an IFA could.
Under the RDR, it’s said that people with more modest sums might be turned off investing or seeking advice because either they don’t want to pay for advice or because IFAs might deem the fee they can make from that investor not worthwhile. Will this be the case?
I don’t necessarily support the idea that just because you may have relatively small amounts to invest, you don’t need advice or shouldn’t have access to it.
The only IFAs that might take this view, are those that are unable to deal with scale. In the end a client is a client and if they need an ISA most financial advisers will help them with that. A really good IFA will do a brilliant job for a client whether they’ve got a pound or a million pounds to invest.
What changes can you see happening to the way IFAs deliver advice?
They’ve got to modify their approach slightly under the RDR, but with the right technology and tools they can continue offering tailored advice according to the scale of the client. For example, True Potential’s Wealth Platform allows IFAs to deal with scale and handle the service of thousands of clients very easily. Under the RDR, effective use of technology will give a silver bullet to financial advisers who use systems that mean they can keep offering tailored advice to larger numbers of clients. That use of technology, which also allows the end user to monitor their finances, will bring confidence to all investors regardless of the size of their pot.
It’s all about building confidence. For those IFAs that can keep imparting advice to clients so that the end user says: “this makes perfect sense, this is right for me, and more importantly it fits in with my appetite for risk so I’m happy to go for it,” it will be for the better.
Are there any loopholes that end customers should be aware of?
The RDR outlaws remuneration between the IFA and product providers for investment and pension product marketing, but there is a bit of a loophole because marketing allowances for protection products is not covered.
In my opinion though, IFAs as individuals aren’t really influenced and never have been by marketing allowances. The people who are influenced are the heads of the national IFA firms and of networks because national groups just about broke even on their costs and make a profit on the marketing allowances.
When will the legislation start to bite with the investing public?
The end of the financial year is a natural high point when people review their finances and find out what they can invest. We also see from the financial advice point of view that there is a tremendous ISA season in March, but that’s naturally supported by IFAs contacting their customers and advising them about what they might be about to miss, and the public reading about it in the newspapers.
Apart from that, you are starting to look at when markets are dominating events a little bit. Unfortunately the tendency is for bad news to be reported rather than good news, which plays against investments a little bit. For instance, stock market record lows will receive more attention than record highs. The FTSE going through 6,000 points and reaching its highest level since 2008 had some mention recently, but it was nothing like last year when it was around 5,000 and made a headline story.