It is a year since the financial services regulator (The Financial Conduct Authority) abolished the payment of commission paid by product providers to financial intermediaries.
This was one one of the steps in a three pronged move to improve professional standards in the retail financial services sector.
Abolition of commission, raising of qualification standards and a stricter definition of what constitutes independent advice were combined to ensure that future mis-selling scandals would be avoided and that there would be a greater degree of transparency for the consumer.
It may well be too soon to make any definitive statements about the success or otherwise of the Retail Distribution Review; like much radical change we have witnessed some examples of the “law of unintended consequences”.
There are fewer financial advisers today than there were a year ago.
Partly this is due to do with the fact that some chose to exit the industry rather than take the examinations and achieve the new benchmark qualification levels now required.
In addition many had to carry out extensive ‘gap-filling’ of knowledge and obtain a Statement of Professional Standing in order to continue trading.
But what is evident and described quite well in a Times article today by journalist David Budworth is that the real cost of financial advice is now very transparent.
The argument is that the old commission model was pretty opaque and left many consumers under the impression that advice was in fact ‘free’.
Clearly advice was never free but as it was usually paid for through commission paid by the pension and investment plan providers (although always fully recouped from plan charges and thus really paid for by the consumer) the consumer might be forgiven for believe it was somehow free at the point of delivery.
However, just because pricing is now transparent it doesn’t follow that consumers will embrace it. Indeed there is some evidence that a transparent pricing policy creates a barrier to engagement.
There are two groups of consumers who have had to come to terms with the new methodology of advisers charging for and being explicit about the cost of their services.
Those who already knew they paid for advice through commission but sort of ignored what the real monetary price was – and those who have simply been priced out of the advice market place.
The former have had to consider whether they wanted to maintain a relationship with their adviser or choose an alternative route of DIY. Looking at the numbers it does appear that the DIY platform providers have done quite well in the last year with a 20% rise in assets under management.
Those priced out of the market are victims of the fact that explicit adviser charging leaves little room for cross subsidy and thus all consumers a now having to pay (or reject) the full price of advice.
Advice is not a cheap commodity to deliver.
A big chunk of the advice fee is made up of regulatory costs. So there is a bit of a double whammy going on here.
Fewer advisers (numbers have indeed declined in the last couple of years) paying higher regulatory fees to protect fewer consumers who get the benefits of regulatory protection because they paid for advice in the first place.
It’s a bit of a mess really.
So like with all things we run the risk of knowing the price of everything and the value of nothing.
Our view is that advice is a valuable (if somewhat costly) commodity and that the future looks bright for the professional advisory firm who adds value to their client’s financial life.
It is perfectly possible that a combined advice and execution offering with the consumer applying their budget for the provision of advice and then executing at low cost online will provide the discerning consumer with a cost effective and product and we expect to see much more of that approach in 2014.
