Question
Could you say what improvement you expect the FSA's "Retail Distribution Review" of the regulation of financial advisers, due for 2013, will bring for investors?Answer
Proposals resulting from the Financial Services Authority’s (FSA’s) Retail Distribution Review have yet to all be set in stone. But from what the FSA has said so far it’s clear they’re intent on pushing financial providers and advisers to treat customers more openly and fairly.
In practice I think the proposal likely to make the biggest impact is scrapping commissions in favour of ‘customer agreed remuneration’. This means that financial products will no longer be able to build commission into their charges, with financial advisers instead having to get their customers’ agreement if their fees are to be taken from the product(s) sold.
For example, at the moment a unit trust typically charges 3% initially and 1.5% a year, from which 3% initial commission and 0.5% annual commission is paid to financial advisers. Under the FSA’s proposals the charges would become 0% initially and 1% a year. If the adviser wants to charge 3% initially and 0.5% a year the customer would have to agree and this would be deducted from the fund (or, as seems more likely, a cash account linked to the fund).
On the whole I think this is very positive as it removes the possibility of commission bias, which has plagued the financial advice industry for as long as I can remember – i.e. an adviser would not have a financial incentive to sell one product over another. It should also boost interest in exchange traded funds (ETFs) and investment trusts, both of which are currently shunned by many advisers as they pay no commission.
The only downside and some will argue it’s a big one, is that evidence suggests the majority of the public are not prepared to pay a fee for financial advice. For all its sins, commission does make financial advice very accessible (although given the poor quality of some of the resulting advice you could counter argue this is not necessarily a good thing).
Other proposals include raising the level of qualifications an adviser must achieve to be call themselves independent and tweaks to how advice is categorised.
All in all I think the RDR is a very positive thing for consumers. It will, no doubt, lead to a shake-up in financial adviser circles, as many will have to make fundamental changes to how they run their business. There will be casualties and some advisers will probably decide to hang up their boots, but such a shake-up is long overdue.
One area which I don’t think the FSA has yet issued a proposal on is the issue of so-called ‘independent’ advisers selling their own product. Where an adviser company recommends more than a nominal level (e.g. 20%) of their clients’ portfolios be held in their own fund(s) I think it’s misleading for them to call themselves independent – especially if their advisers have a financial incentive to sell their own funds other others. I’d like to see the RDR address this issue before it gets out of hand.
It’ll probably take a year or two for the dust to settle post RDR, but I think IFAs will start to be seen in a more professional light and the public will slowly become less grudging at paying an hourly fee, as they would an accountant or solicitor. However, IFA’s services will probably be biased towards the more wealthy, leaving the majority of the population to seek advice from the banks and insurer sales forces – who will probably continue doing a fair to mediocre job.
I also expect more people to take matters into their own hands and advise themselves on more basic matters. Post RDR they should then be able to buy direct at a lower price than using an adviser, without needing to buy via a discount broker. While discount brokers will still have a place in the market, they’ll have to work far harder and offer more value added services to entice customers away from going direct – which should offer the cheapest deal – a sea change from where we are now.
Of course, there’s still plenty of time for the FSA to change its mind, that’s if it even still exists come 2012/13. But I hope whatever happens the RDR gives the industry the kick it so badly needs.
Could you say what improvement you expect the FSA's "Retail Distribution Review" of the regulation of financial advisers, due for 2013, will bring for investors?Answer
Proposals resulting from the Financial Services Authority’s (FSA’s) Retail Distribution Review have yet to all be set in stone. But from what the FSA has said so far it’s clear they’re intent on pushing financial providers and advisers to treat customers more openly and fairly.
In practice I think the proposal likely to make the biggest impact is scrapping commissions in favour of ‘customer agreed remuneration’. This means that financial products will no longer be able to build commission into their charges, with financial advisers instead having to get their customers’ agreement if their fees are to be taken from the product(s) sold.
For example, at the moment a unit trust typically charges 3% initially and 1.5% a year, from which 3% initial commission and 0.5% annual commission is paid to financial advisers. Under the FSA’s proposals the charges would become 0% initially and 1% a year. If the adviser wants to charge 3% initially and 0.5% a year the customer would have to agree and this would be deducted from the fund (or, as seems more likely, a cash account linked to the fund).
On the whole I think this is very positive as it removes the possibility of commission bias, which has plagued the financial advice industry for as long as I can remember – i.e. an adviser would not have a financial incentive to sell one product over another. It should also boost interest in exchange traded funds (ETFs) and investment trusts, both of which are currently shunned by many advisers as they pay no commission.
The only downside and some will argue it’s a big one, is that evidence suggests the majority of the public are not prepared to pay a fee for financial advice. For all its sins, commission does make financial advice very accessible (although given the poor quality of some of the resulting advice you could counter argue this is not necessarily a good thing).
Other proposals include raising the level of qualifications an adviser must achieve to be call themselves independent and tweaks to how advice is categorised.
All in all I think the RDR is a very positive thing for consumers. It will, no doubt, lead to a shake-up in financial adviser circles, as many will have to make fundamental changes to how they run their business. There will be casualties and some advisers will probably decide to hang up their boots, but such a shake-up is long overdue.
One area which I don’t think the FSA has yet issued a proposal on is the issue of so-called ‘independent’ advisers selling their own product. Where an adviser company recommends more than a nominal level (e.g. 20%) of their clients’ portfolios be held in their own fund(s) I think it’s misleading for them to call themselves independent – especially if their advisers have a financial incentive to sell their own funds other others. I’d like to see the RDR address this issue before it gets out of hand.
It’ll probably take a year or two for the dust to settle post RDR, but I think IFAs will start to be seen in a more professional light and the public will slowly become less grudging at paying an hourly fee, as they would an accountant or solicitor. However, IFA’s services will probably be biased towards the more wealthy, leaving the majority of the population to seek advice from the banks and insurer sales forces – who will probably continue doing a fair to mediocre job.
I also expect more people to take matters into their own hands and advise themselves on more basic matters. Post RDR they should then be able to buy direct at a lower price than using an adviser, without needing to buy via a discount broker. While discount brokers will still have a place in the market, they’ll have to work far harder and offer more value added services to entice customers away from going direct – which should offer the cheapest deal – a sea change from where we are now.
Of course, there’s still plenty of time for the FSA to change its mind, that’s if it even still exists come 2012/13. But I hope whatever happens the RDR gives the industry the kick it so badly needs.
Read this Q and A at http://www.candidmoney.com/questions/question137.aspx
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