August 2007

RDR arrives

Unless you have been in the Australian Outback for the last month or so, and if you have I hope you had a nice time, you can't fail to notice that the FSA published their Retail Distribution Review Consultation Paper.

The first thing to remember about the RDR is that it is a consultation paper - it runs to just over 100 pages including appendices and invites us all to comment on 70 of their own questions and any others we may have by Monday 31st December 2007. I would suggest you download a copy from the FSA's website and read it.

The Adviser Community

The most radical proposal in my view is that the adviser community is dismantled and reassembled once again - just a few years after depolarisation.

I welcome any approach that raises the knowledge of advisers. In my opinion the RDR doesn't do this - it simply distinguishes between those that have advanced qualifications and those that don't.

The RDR proposes that professional financial planners (PFP) attain this status through advanced examinations, to distinguish them from general financial planners (GFP). The former giving more complex advice to those who can afford it, and the latter giving "primary advice" to those consumers who cannot afford or need the more complex advice.

Adviser Remuneration and Product Pricing

The RDR is suggesting that adviser and provider costs are distinct and separate - so called "factory gate pricing".

The author's remark that adviser remuneration should be seen as client money as opposed to the cost of the product, and that, if I interpret it correctly, that the fees that a PFP must charge can, if desired, actually come from the product, but must be explicit.

It is not clear to me how GFPs giving "primary advice" would be remunerated but I would surmise that they are likely to be employed staff either with banks or life offices.

This I think could spell the return of the tied direct sales force, although probably not to the same size as we had in the late 80s and early 90s.

That in itself may not be such a bad thing - providing the status of the adviser is made clear to the consumer.

But I have other concerns.

If indemnity commission is removed for GFPs then it will become impossible for those who are self employed or who work for smaller firms to continue working - the cash flow would simply make it unviable. This will increase the strength of the distributors and eventually lead to less choice for the most financially vulnerable, least financially astute end of the market.

The RDR sees banks, building societies and insurers providing GFPs and "traditional" IFAs offering the more advanced PFP services. But I think that overlooks the ambitions of the banks and insurers - the former are managing the current and savings accounts of the "HNW" and are already targeting their investments and other advice needs. These efforts will undoubtedly be stepped up if the RDR proposals go through.

My concern is that if this change isn't carefully managed the burdens of segmentation of business, compliance reorganisation and consumer awareness - will play in to the hands of the banks and insurers who can absorb this change more easily - and their influence will become even greater jeopardising the independence of even the larger IFAS.

Improving consumer awareness and adviser knowledge must always be welcomed, as is clarity as to the cost of advice and the effect of that cost on the product if taken as commission. But don't we have that already with the current legislation and TCF and if this were properly implemented wouldn't it meet most of the RDR's aims?

Tony Clements
IFA
Park Row Corporate and Private Clients