This video is part of Morningstar’s special series about the Retail Distribution Review (RDR).
Video Transcript:
Alanna Petroff: The RDR changes that are coming into effect could make it potentially difficult for lower net worth people to get tailored independent financial advice. Joining me now to talk about the RDR changes and what this means for investors is Darius McDermott. He is the Managing Director of Chelsea Financial Services. So, Darius thanks for coming in.
Now, let's talk specifically about these RDR changes and what they mean for these lower net worth people?
Darius McDermott: Yeah. It's a big change for lower net worth investors. IFAs are going to have to charge substantial fees to meet their regulatory burden. They're going to have earn a certain amount of money for every client that they deal with. If you're investing in a £10,000 ISA, it's not going to be economic either for the IFA or indeed the client to pay a huge amount of upfront fee just to place an ISA.
There is a figure bandied around the industry about the level of about £50,000--that it's going to be uneconomic for IFAs to deal with people under £50,000. If you had an inheritance say of £20,000, and you had to pay an initial fee to an IFA of say £2,000, that's going to lead to you losing 10% of your investment amount straightaway. So, lower net worth investors are going to see a change as to their ability to actually find financial advice at the right price.
Petroff: So, you work in the investment broking business and you've been getting a few e-mails here and there from individuals saying, ‘what are my options?’, because maybe they don't want to be paying these upfront fees to IFAs. So, tell me a little bit about why you're potentially going to be seeing more business.
McDermott: IFAs have to make a certain amount of money out of clients. Cost is going to be a big issue. Clients are getting communications from their adviser saying that they need to charge a certain amount of money either as a flat fee or an ongoing amount, and sometimes that can be prohibitive to investors who I think are gently starting to look more at the non-advised sector, where they don't get advice and that's the clear difference. If you need advice...
Petroff: … You don't give independent advice.
McDermott: No. We give information, guidance to try and help people along their own way to make the correct decision for themselves. Cost is a big part of that. If investors still want to get access to funds using a non-advised investment broker like ourselves, it’s going to still be the cheapest way.
Petroff: Okay. So, tell me a little bit about how you are making money through your business, because now IFAs will have to be charging those upfront fees and they won't be getting trailing commissions anymore because of the RDR rules. You can still get those commissions when you are selling funds through your platform. So, tell me about how the charges will work for your clients.
McDermott: I mean, a typical fund manager fee is 150 basis points, or 1.5%. From that one fee, an annual fee, a simple fee, they pay for the trail commission which we can still take at least until January 2014. That also pays for the platform fee and then the fund manager fee, so it's called a bundled charging.
IFAs are going to have to unbundle their charging and they're going to have to charge separately, which is more transparent. But again there is already early evidence that the unbundling total will be probably greater than the 150 basis points that investors are typically paying today. So, we still are going to be a cheaper way of accessing funds for individuals.
Petroff: Okay. So, let's just go over that again. The annual fund charge that you might pay would have been 1.5%; and then the breakdown of those charges would be, your fund manager would get 0.75% of that; the platform where you buy and sell funds would get 0.25%; and your IFA in [2012] and before that would get 0.5% let say, and now they cannot take that commission.
McDermott: No.
Petroff: So, you can still receive that 0.5%?
McDermott: We can. We've been given at least a further 12 months that we can continue to operate in the bundled way, whereas IFAs are having to change their models straightaway.
Petroff: Okay. Do, you think that you're going to be seeing a rush of clients coming in your door generally around the beginning of 2013? What are you expecting? Are you preparing for the mobs?
McDermott: I think it is going to be evolution rather than revolution. I think there is likely to be increased interest in the non-advised sector, primarily from a cost-based argument. As we said, there are lower net worth people, people just wanting to do an ISA. It's going to be uneconomic to buy your first ISA for £10,000, or £50 a month, and have that come with advice. So yes, we are expecting to see an increase, but I don't expect the doors to be sort of knocked down early in January 2013.
Petroff: Okay. Thank you very much for coming in today.
McDermott: My pleasure.
Petroff: That was Darius McDermott from Chelsea Financial Services. I am Alanna Petroff, thank you for watching Morningstar.
