Why RDR won't stop poor deals for clients
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The recent brouhaha about aggressive tax avoidance is an absolute non-story in the financial world.
We all know there are three types of accountants – ones who are “decent” and go by the book, others who are the polar opposite and fly in the face of the law and the third type being the aggressive tax planner who operates in various shades of grey in the hope that their perfectly legal tax avoidance schemes slip by unnoticed by HMRC into a satisfactory outcome for their clients (who have no doubt signed a very broad waiver expunging the accountant of any potential blame as and when the scheme is outed).
Most of us on the inside know it is a systemic flaw rather than the fault of hard-working comedians.
What this type of coverage does do, however, is give me the chance to remind us all of the other cringing design flaws we all work with. Take commissions v fees, for example.
Despite the howls of protest, we all know that the RDR will come into effect on January 1 next year, with advisers continuing to take whatever level of fee they fancy. We also know that the less morally robust types will readily “explain” their fees to their hapless victims and get them to “agree” it, paid for, up front and out of the product.
The sweeping assumption that fees are somehow morally better than commission was embraced by the RDR policymakers when the whole sorry saga was dreamt up. And before anyone asks me to stop carping on about the RDR, we have been “agreeing” fees for years but like to think we give our clients the full range of options. Predictably, many still prefer to pay via the cunning, interest-free, often tax-relievable “commission” route - which is still available of course.
So am I to believe that once we go through the New Year, people at the FSA will think to themselves that the “commission ban” box has been ticked so we can all forget about that particular evil? Or are they secretly thinking they got something wrong and it has all been a complete waste of time and money as it actually does nothing effective to address over-charging scoundrels?
The unpalatable truth is that nothing will change other than the word commission will be replaced by the word fee.
And to counter the effect of an almost complete cessation of regular-premium business (the backbone of many an IFA’s business model) most are understandably putting in place business structures that charge up to a whole percentage point in “fees” to sit on and “manage” client portfolios. Then there is the wrap fee, product charge, AMC and TER.
I must admit I am personally holding my breath for another charge somewhere or other. I mean, I had never heard of TERs until a couple of years ago.
And finally, we are starting to see banks ditch their whole of market models by rolling out their new and improved service offerings to the unsuspecting public. Trust me, your average Joe Public has no concept of what independent or restricted means to them, so it makes little difference to their mental well-being if either option is put in front of them – banks will dress it up to sound good either way.
Still, that will give the FCA plenty to get their teeth into when they take over the reins.
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Tom Kean is director of Thameside Wealth Management
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Readers' comments (5)
Patrick Schan | 18 Jul 2012 1:21 pm
Exactly what I (and many others) have been saying for years. And completely correct.
RDR is a sham piece of legislation.
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Anonymous | 18 Jul 2012 1:34 pm
Tom Kean,
This has got to be one of the worst articles I have read on RDR. It’s quite easy to dismiss RDR and say nothing will change, but the fact is that change was required and RDR (for all its perceived flaws) is a giant step in the right direction.
Unbundling fees will bring about greater transparency, and doing away with commission based remuneration will help to ensure the right fund/product is recommended; rather not just the ones paying the greatest trail. A separate platform/wrap fee will lead to competitive fee structures and innovation (the UK is miles behind when it comes to platform innovation). Financial advisers, like other professionals (accountants, lawyers) will be forced to justify their fees and the client will be able to see (through transaction statements at the very least), the amounts being paid to their adviser for ongoing services. Currently this payment is hidden in the AMC and paid out of sight.
I’m not saying that all RDR initiatives are perfect. There will be teething issues and changes no doubt… but to dismiss RDR as a waste of time is simply ignorant.
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Jane Anderson | 18 Jul 2012 1:42 pm
Absolutely true! the RDR will do nothing to stop the rogues in our profession. They will be the first to find new angles and will probably do very well out it. On the other hand, those of us who act with integrity and always have done will see our income plummet and our businesses become unsustainable.
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Glen McKeown | 19 Jul 2012 10:50 am
The article is, I believe, a fair assessment on RDR which has concentrated on process rather than substance. It is based on a set of fairy tale ideas that have not been tested in real life. Indeed quite a number of the fundamentals of RDR have actually been challenged by existing research, which suggests that there will be at least as much chaos after RDR as there was before.
Which is why I consider the input of anonymous 1:34pm to be a disappointing, but typical, knee jerk reaction. This is someone that believes the fairy tales on which RDR is built. Sentiments are all very nice, and can held out as an objective, but do not assume that they will provide a good outcome. Many people would consider Socialism a good objective, but it relies on too many assumptions of "good behaviour", so its success rate is vanishingly small. Real life requires something more robust.
RDR is built around the same type of flawed anticipation, not merely in respect of advisers, but also providers and consumers. The recent episodes with Barclays and HSBC demonstrate only too clearly the gap that can appear between the perception (banks are good and trustworthy) to the reality (banks are designed to make money - somehow).
Anonymous is incorrect in saying that opponents of RDR believe that it will change nothing. On the contrary it will change a lot, but the major question is - will it be a giant step in the right direction, or merely a giant stumble in the dark that results in an expensive mess.
If RDR results in a mess, and that is my bet, providers and advisers need not worry. There will always be enough work to keep them in employment (though the income may not always cover the costs of Regulation, in all its forms). It is the consumer that will pick up the final bill, through higher charges, through a more restrictive access to products, and, for many, through total exclusion from advice and products.
There are a number of aspects of RDR that could be beneficial, but then there were many aspects of the Third Reich that were beneficial to Germany. The presence of beneficial aspects does not automatically mean that the total process is beneficial.
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Dave Hedge | 20 Jul 2012 2:21 pm
The problem is that RDR was dramed up by a bunch of cretins that have no idea how the vast majority of people live, and think all advisers are out to twist their customers.
We charge a fair fee or commission, disclosed to the client, which they agree to. Some of this may be higher, but subsidises work that we often do that would be at a loss, or we don't charge for. eg. sorting out the mess that passes as NPI Pearl's apology for administration.
By a long way, our biggest overhead in time and money is keeping the incompetent cretins of Canary Walk in their idle luxury.
RDR will disenfranchise the average person and leave them at the mercy of the banks.
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