The cost of advice will not increase
The Financial Services Authority (FSA) have started a process of explaining to the consumer how their interaction with the Independent Financial Adviser (IFA) community will change after the implementation of the Retail Distribution Review (RDR) in January 2013.
Sorry that is three, three letter acronyms in the first sentence – I do apologise!
One thing the FSA is trying to do is to allay the fear that the cost of advice will be higher in the future because of the RDR. Our view is that it will not be any more expensive to engage with an IFA than it is now.
Commission is being abolished and in the main we think that this is a good thing. That is not to say that there is substantial evidence that commission results in inappropriate advice.
Our reason for being positive about its abolition is that we are big fans of transparency.
Commission tends to be opaque and despite a decade and a half of “disclosure” too many consumers are either blissfully unaware of the cost to them of advice or think that commission is a no cost to them option.
Good practitioners have always disclosed the commission that they will receive and been able to explain to their clients why they are worth that payment.
Poor practitioners have either disguised the payment – only yesterday one of my Financial Planners came into the office with an illustration received by a client from another IFA where the final page disclosing commission had not been provided – or implied that it does not cost the consumer at all with the payment seemingly coming from some “magic pot” of provider money.
Note: the investor always pays.
What we don’t like about commission is that we think the cost of advice and implementation services should be determined between the consumer and the adviser without influence from product providers.
Surely that should be one of the definitions of independence?
So commission is to be replaced by “adviser charging” but the ill-informed segment of the advisory community will bleat that the abolition of commission means that consumers will have to pay fees.
This is just plain wrong!
Adviser charging uses the same payment mechanism as commission with the payment to the adviser being deducted from the invested money so in fact most transactions with IFAs will be the same as they currently are.
Some commentators have suggested that the price of advice will rise.
Arguments in favour of this include the fact that VAT will be levied against adviser charging thus raising the cost by 20%. This is just wrong.
If the activity that was carried out before the implementation of the RDR was subject to VAT then VAT will apply post RDR. If the activity before was VAT exempt it will be so post RDR.
The reality is that it is not the method of payment for services that determines whether VAT applies or not, it is the nature of the service itself. In other words commission can be subject to VAT the same way as adviser charging may be.
Others have argued that the absence of the cross subsidy (where some consumers take advice but don’t buy a financial product that generates commission, have those services paid by the those who do buy a commission generating product) will result in higher costs.
I have some sympathy with this argument.
Those who previously did not pay before may well have to pay if they engage with an adviser post RDR. So “yes” cost for them will rise.
But taken in the round the cost of advice generally will not rise.
I confidently predict that overall the cost of advice may even be lower in the future as long as we create a confident consumer audience who is prepared to shop around and seek value for money.
Some feel that in addition to a rise in the cost of advice the availability of advice will reduce as some advisers choose not to, or are not capable of, passing the examinations needed to achieve the new regulatory level.
I don’t think that this argument has been fully formed because it ignores the development of new advice delivery mechanisms one of which I described in my recent webcast – www.thoughtleadershiplive.com/client/2011/5/5/delivering-independent-advice-to-the-mass-market.html.
There is one area where the movement away from commission to adviser charging is perhaps more challenging and that is for those consumers who wish to accumulate wealth through regular savings and investments.
Here the absence of commission may well result in less “push” from the intermediary community. However I am confident that the dynamic and forward thinking IFA community will develop alternative approaches to this problem.
The cost of delivery of services to the consumer post RDR will be more transparent and I would argue even more competitive cost wise.