The aim of the Retail Distribution Review (RDR), which was implemented at the end of last year, was to increase consumer confidence and trust in the retail investment advice market by modernising the industry.
The manner in which advisers are remunerated was always an important part of delivering on this aim.
As part of the RDR, the Financial Services Authority (now replaced by the Financial Conduct Authority) wanted to address the potential for adviser remuneration to distort consumer outcomes. Commission the FSA believed has the potential to introduce product and provider bias.
Commission payments from retail investment products were banned from 31st December 2012 and an allegedly more robust system of adviser charging was introduced.
But did the FSA go far enough?
The recent thematic review research from the Financial Conduct Authority indicates that the intermediary market has simply replaced commission with adviser charging.
Advisers who were charging their clients 3% initial commission and 0.5% fund based commission now appear to be charging 3% initial adviser charge and 0.5% (or higher) ongoing adviser charges.
Recently we saw the FCA chief executive Martin Wheatley point out his concerns about ‘dealing bias’, where adviser charges based on a percentage of assets invested could distort advice outcomes for consumers.
We understand the FCA is also planning to tackle concerns about ongoing adviser charges.
At Informed Choice, we believe that all consumers of retail financial services should be treated fairly.
This is our manifesto for fair adviser charging; something that we practice at Informed Choice and which we believe all of our clients want – charges which are transparent, fair and great value for money.
1 – Adviser charges should be known and agreed
The new rules introduced at the end of last year require advisers to disclose their charging structure upfront and in writing. Recent FCA concerns about ongoing adviser charges suggest disclosure is not as robust as it might be.
As a result, we believe that all clients should receive a detailed engagement letter which describes the services they will receive, how these services will be delivered and how much they will pay.
To enable a fair comparison, adviser charges will be expressed (in writing) as both a monetary amount and converted back into a percentage of possible investable assets.
Disclosure as a monetary amount will ensure that consumers are not mislead into thinking a percentage represents a smaller adviser charge than a monetary amount. And actually FCA Conduct of Business rules require disclosure to be in monetary amounts.
2 – Ongoing revenue pays for ongoing service
Another rule introduced on 31st December 2012 means that advisers can only receive an ongoing charge where they are providing an ongoing service to their clients.
We believe this should be extended to ongoing commission payments received as a result of policies established before the end of last year, when the new rules came into force.
Clients should receive an annual statement from their adviser confirming the amount they have paid and the services they have received during the past twelve months, along with an agreement to sign to confirm they wish to keep paying to receive these services.
3 – Product providers need to treat their customers fairly
One anomaly created by the Retail Distribution Review was the concept of ‘disturbance events’ and product providers switching off ongoing commission to advisers. To explain this in simple terms, some product providers took any opportunity to stop paying advisers commission from legacy products.
This is potentially a good thing, as ongoing commission or adviser charges should only be paid when an ongoing service is provided, but product providers need to start treating their customers fairly because currently they do not.
Where commission is switched off by a product provider, they should immediately reduce the product charges by the equivalent amount.
This isn’t happening in most cases at the moment and often results in the customer paying twice; once to fund commission which is no longer paid and once in the form of ongoing adviser charges to their new adviser.
4 – Abolish the ‘free advice’ myth
The FCA recognises that advisers offering ‘free’ advice is a way of generating a product sale to create an initial adviser charge. This is the ‘dealing bias’ Martin Wheatley of the FCA was referring to recently.
Most consumers are wise to the fact that advice is never ‘free’. Indeed, advisers working on this speculative and contingent pricing basis need to ensure that they do not have an added incentive to recommend a financial product, so they can levy their adviser charge.
Instead, our view is that advisers should charge fairly for the delivery of professional advice and charge fairly for implementing their recommendations. We believe that the balance of charging should focus on the former, with a more modest fixed amount charged for putting in place a product solution.
5 – Consumers should have choice when it comes to payment methods
Assuming adviser charges are fair, known and agreed, there should be flexibility around payment methods.
It is often more efficient for a client to pay adviser charges from a product or wrap platform, with the provider facilitating the payment of fees. Consumers should retain this choice.
6 – Apply these guidelines to all forms of distribution
The same rules about adviser remuneration should apply to all forms of distribution, whether it be independent or restricted, advised or non-advised.
Where one group of advisers has the ability to follow different rules, for example through ‘vertical integration’ business structures or execution-only exemptions from Retail Distribution Review rules, they undoubtedly will.
The FCA role is to create a level playing field so consumers can feel confident they will be charged fairly regardless of the source of the service.
Put these six points in place and the Financial Conduct Authority will go a long way towards increasing consumer confidence and trust in financial services.
What we hope to see continue emerging is an increasingly professional UK retail financial services sector where remuneration is linked to the value of advice, rather than product sales.
