This article was written by Alex Riley, a director at Bunker Riley. It was written specifically for Morningstar’s special series about the Retail Distribution Review (RDR) in the UK. It is part of Morningstar's "Perspectives" series, which is a series of articles written by third-party contributors.
I’m excited! Not words you’d usually associate with financial legislation but I’m genuinely upbeat about the changes that the Retail Distribution Review (RDR) brings for both investors requiring advice and those working within the advisory community.
In the near 20 years that I have worked as an adviser, this is the first time that a consumer will be able to approach an adviser for assistance and have complete confidence from the outset that:
A) Advisers will actually know what they are talking about
B) The cost of services will be known
C) Advice will not be dependent on a product sale.
In turn the adviser can be confident that the service that is offered will be valued and paid for without the need to find a ‘product’ solution.
In summary, the main changes being implemented under RDR are:
- A ban on commissions and a switch to a fee-based service
- Disclosure as to whether advice is offered on an “Independent” or “Restricted” basis
- A big increase in the benchmark adviser qualification
Now, these are the ‘game changing’ rules. Of course, it will take time for the advice industry to reach a point where financial advisers are considered on par with accountants and solicitors, but there are good reasons as to why RDR is a clear step towards fulfilling that comparison.
Evolution in the Cost of Financial Advice
Like most advisers, we consider our services to be highly professional and the costs of our services are fair in relation to the amount of work involved. However with commissions historically available on some investment products of up to 10% of the initial investment amount, it has not been difficult for consumers to be duped into buying unfair, expensive (and sometimes inappropriate) investments by the unscrupulous end of the advisory market. Advice has never been free since customers generally paid for advice indirectly through commissions, which are paid for by product charges levied against investments. But by clearly segregating adviser fees from investment products, and placing adviser payment in the hands of the consumer, over time some uniformity of what is considered an acceptable adviser fee is likely to emerge.
Once there is a level playing field on adviser charging, consumers just won’t pay for advice from firms who charge over and above the market rate. Clearly specialist services and ‘prestige’ firms will cost more than others but once an acceptable range of adviser fees is established and a market rate is universally known, consumers will be able to see clearly that going to an independent adviser who for example may charge 2% of their initial investment for a detailed advice process, makes a lot more sense than receiving a ‘product sale’ from a bank who may have historically deducted 8% in commission from the initial investment for very little input. The recent withdrawal of Barclays Bank from the advisory community could be considered a testament to this market evolution. The closure of sales-driven, commission-based adviser firms will leave consumers less likely to be on the receiving end of poor advice. That can only be good in my eyes.
Raising the Bar: Adviser Qualifications
Together with the ban on commissions, a raised bar in terms of adviser qualifications has been set in order to trade. Qualifications do not in themselves certify an adviser’s ability to provide sound advice, but it certainly does minimise the chance that a consumer will be dealing with an adviser who is just not capable of understanding the complexities of the financial world. In a generation before I entered the industry it was common for retiring footballers to become either pub landlords or ‘financial advisers’. No disrespect to footballers out there, (they retire with much more money these days anyway!) that just won’t happen today and there is a clear aim to attract to the industry only the right calibre of adviser. In turn the number if advisers who provide poor advice will reduce over time and although a fair comment has already been made that there will be less opportunity to receive advice, access to the right advice, in my opinion, supersedes this concern.
So, for those who actually have the need to pay for advice (and remember that self education and doing it yourself will be an option), RDR will over time lead to reassurance and opportunity. Consumers can benefit from a new market rate for the cost of advisory services, which will likely offer far better value than the old commission structure and minimise the chances of getting ripped off. The natural removal of advisers who cannot or will not meet the new requirements will provide reassurance to consumers that, of the advisers that do remain, there is less chance of unknowingly choosing a charlatan. Advisers on the other hand can potentially benefit from a potential rise in the number of individuals without advisers as many people review their existing relationships after having been made aware of the cost and services on offer.
I’m excited by these changes because for many years it’s been the high-commission, incompetent advisers who have hit the headlines and in the future I hope that the image of financial advice in the UK will be raised to a professional standing.
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This article was updated January 2013. It was originally published November 2012.
