With the Retail Distribution Review (RDR) being fully implemented on 31st December 2012, consumers of retail financial products should have greater confidence in the transparency of adviser remuneration.
The RDR abolishes commission on the sale of retail financial products and introduces the concept of ‘adviser charging’, where the price of advice is agreed in advance between the investor and adviser.
As a result, there will be no more interference from product providers such as life assurance companies or fund managers in the setting of charges for advice.
At least that is the intention.
What investors will need to watch out for from the end of this year are the dangers of ‘vertical integration’.
A vertically integrated financial services firm is one which manufactures and distributes its own products. There are already plenty of examples of these, mostly from tied advisers which combine their sales (packaged as financial advice) with in-house investment funds and products.
Some firms purporting to be independent are also getting in on this act.
Vertical integration is an issue for investors because it could allow these firms to get round the commission ban.
Because vertically integrated firms get a share of the revenues from their in-house funds and products, it will be possible for them to make it appear that the ‘advice’ they offer is cheaper than the market rate.
Independence will naturally be compromised where the business model for a vertically integrated firm – even one claiming to be an independent financial adviser – requires the motivation to always recommend the in-house solution, as this is where the remuneration will come from.
There is absolutely nothing wrong with vertical integration where the costs and risks are properly disclosed.
As a ‘restricted’ financial advice proposition, it can introduce significant cost savings which should be passed on to the investor with a cheaper advice, investment and platform administration solution.
What we fear will happen in practice is that vertical integration will be used as a way to bypass the commission ban, with commission effectively continuing to be paid out of in-house funds and products and ‘advice’ offered as a conduit to sell these to investors.
Hopefully this is something the Financial Services Authority (FSA) will be closely monitoring from the end of this year, as it would represent a failure of the original RDR objectives if such a loophole were allowed to exist.
Photo credit: Flickr/Hector Milla
