RIP off Britain – Retail Investment Products, Advisers, Clients Rest In Peace?

Those of you that occasionally read my blog or any of the financial press will be aware that since 31st December 2012 financial services in Britain underwent a major reshuffle (RDR). This was intended (correctly in my opinion) to raise the standards of advisers (thereby leading to better advice) and also ensure that they were not biased in their advice. This was meant to be so that the UK consumer would get a better, clearer understanding of financial products and financial advice in general. Sadly, it is my opinion (admittedly only 3 months into the new regime) that this has failed.

I would be one of the first to agree with the FSA that product and provider bias was rife. In my opinion, the only way to address this was to charge the same irrespective of the product or provider – which I did from the very day I set up Solomons way back in the last century (1999). So this has been perfectly possible for a long time. This meant that as the adviser the product selection was based on what the product could do, not on how much I would be paid. Sensible I thought (as did/do clients). However this still relies on products being arranged, sometimes this is not sensible or necessary and smacks of selling products, not necessarily doing proper financial planning. Hence why I charge fees for service and advice.

Sadly there were relatively few advisers operating in such a way and even fewer doing proper financial planning. I estimate that perhaps 90% were “old world” up until around 2010 when many of them really did have to begin to address their own business model.  So “RDR” was going to be a significant challenge to many advisers.  After all, how does one change a business where a £200 a month pension earns commission of £1500, but has clients without £1500 to pay a fee to set up a pension for £200 a month. To say that a few advisers had not done their own sums would be a considerable understatement.

Sadly, the regulation which came from a well-intended place has become hugely complex. We all knew the numbers of advisers would reduce. Today the regulator admitted that more had gone than they expected (20%) and if you went to a Bank, there are now 44% fewer bank advisers (and falling, as most Banks cannot offer a cost-effective service). Add in to the mix, VAT on fees, fund managers using the opportunity to increase their charges and pour blame on RDR, fewer more qualified advisers and basic economics tells you that supply and demand have altered. Less supply, greater demand = higher costs. Add in higher regulatory costs and processes designed to prove good practice and avoid getting into trouble with the regulator, a smaller market of advisers… then costs for IT, compliance, consulting and any bright idea have all increased way above the rate of inflation. Chuck in what is tantamount to blood money – a share of the compensation bill for firms that failed to serve their clients and went bust (or the product did) for millions to be shared across a smaller number of firms and you get a sense of the “pressures” that advisers are now under (which is why we have little choice but to employ compliance firms that advise, but don’t actually take responsibility). Hence adviser fees have risen and for some people, it is the first time that they have ever paid their adviser a fee.

So, at this point in March 2013, I see little evidence to disprove my belief that more people are being ripped off than before. Fewer people will get advice, many will resort to DIY advice, which I can understand, but invariably has very poor results that make investing more expensive not less (check out The new rules, for some reason best known to the regulator, only apply to retail investment products, not all financial planning products. It is still possible for advisers to earn commission from protection products such as life assurance,  income protection and critical illness cover – and yes the premium will dictate how much commission is paid, which still (strangely) varies between companies. Oh and if I agree to provide Fund Management group XYZ with £xm this year I can get a better deal… you what? (no I don’t). So if I seem a little pithy today, what with the end of the tax year rapidly approaching and a tonne of new papers for clients to sign to simply top up an existing pension or ISA, please excuse my cynicism, but I fail to see how clients have benefited from this, which is surely what any decent adviser will be thinking and having to explain. Mind you there will be plenty out there fudging the difference between an IFA and a restricted adviser (the only two permitted forms in a binary choice of really representing you, or partly representing you). Still, its no joke that on 1st April (April fool’s day) the FSA changes its name to the FCA… and we all have to reprint our stationery.

Dominic Thomas: Solomons IFA