The Retail Distribution Review (RDR) has its roots in aiming to give more clarity for individuals looking to invest.
It also had the aim of raising the professional standards of financial advisors and removing what has, for some time, been considered a conflict of interest in how advisors are paid. The RDR is looking to make payment for advice and service standards provided by advisors more transparent by putting an end to commissions.
Published by the Financial Services Authority, the Review has led to new rules which mean that advisors must disclose explicitly and charge their clients for the pre-defined services they have agreed, either in their role as an IFA or a Restricted Advisor. These changes came into effect at midnight on 31 December 2012 and apply across the advisory board, no matter for whom the advisor works.
There have been various attempts to clarify the charging structure of retail investments over the years, but this recent change which has come about thanks to the RDR, is arguably the most significant. While consumers have no doubt always been aware that there are charges involved in retail investment, the clarity of specific charging structures and who receives which proportion of those charges has been somewhat complex and unclear until recently. The particular area of concern is commission.
Until these recent changes, many IFAs relied purely on commission as their remuneration for the services they provided. This way of being paid has been heavily criticised, with suggestions that certain unscrupulous advisors may be tempted to recommend an investment to a client because it paid a higher rate of commission than another. While professional and ethical advisors would of course never consider recommending one product over another because of the income the product would generate, there have been cases of such behavior (that we’re all aware of, I’m sure).
From 1 January 2013 onwards, consumers have the opportunity to pay an hourly rate, a set fee, a monthly retainer or a percentage of their total investment in return for the advice they receive. So what does this mean for IFA’s? For many it will mean the end of the road, but for others these changes will be welcomed as a positive more towards what’s required to raise the industry to the level it deserves to be.
It is being widely quoted that many IFAs are considering either leaving the industry or adopting the new restricted advisor status as a result of these changes. This is backed up by the FSA who’s quoted as predicting that some 6,000 advisors could “go to the wall”, so it’s clearly not good news across the board. What’s more, from a consumer point of view, Deloitte has announced that more than 5 million consumers will either wind up either deciding not to take advice under this new regime or will not be able to because of new charging structures.
So from an IFA point of view, is RDR an opportunity or a threat?
There’s no doubt that change of this nature always causes anxiety and insecurity, but when packaged and communicated correctly, charges and fees are nothing to be frightened of. In fact, for many IFA’s such as us here at Provisio, this is just the opportunity we have been waiting for to be able to demonstrate in clear and transparent terms the value of the Independent Financial Advice we can provide.