Retail Distribution Review

Written evidence submitted by Jon Lowson, IFA Research and Reports Ltd

I was dismayed, reading this article on the "Moneymarketing" website, that IFAs in favour of RDR have not approached you to  make their case:  http://www.moneymarketing.co.uk/adviser-news/garnier-plea-fails-to-bring-out-pro-rdr-ifas/1024423.article

However, this perhaps confirms rather than refutes Stephen Gay’s (AIFA) assertion that the Anti RDR lobby is a vocal minority. The fact that those who are NOT opposed to RDR stand silent, does not mean that the Anti-RDR campaigners are in the right or even has popular support. People are always more ready to complain than they are to stand up just to say they are happy or content.

I am not an IFA myself, but I provide services to many firms of IFAs and get to see a wide cross section of the community. My personal experience (which seems consistent various surveys I have seen) is that there is a reasonable sized minority of IFAs (around 15% to 25%) who have no plans to pass the higher level qualifications and are utterly opposed to the idea of RDR. There is probably a similar minority of (so called New Model) advisers who will be glad to see these RDR changes come into force, as it reinforces the decisions they have already made about how they run their business (i.e. Higher Qualifications and Fee Charging rather than commission).

This leaves a larger number of IFAs (probably 50% to 60%) in the middle ground, who have either got the required qualifications already or who are quietly preparing to make the necessary changes to meet RDR requirements.

If some of those in the middle ground were given an easier  option (grandfathering), human nature means that they would probably take it, but they are not necessarily going to leave the industry if RDR proposals remain unchanged. Those who are prepared to go along with the RDR changes (either begrudgingly or wholeheartedly) are in the majority (probably 70% to 80%). The whole RDR process should not be de-railed for the sake of 20% to 30% of advisers who are holding out for a free pass.

If you want some pro-RDR opinions, I am happy to give you mine:

1. Qualifications are not necessarily a substitute for experience, but do demonstrate that someone has a certain level of knowledge and understanding of the subjects they profess to be experts in.  The RDR allows for alternative methods of assessment, for those who don’t want examinations, but the marketplace has not found sufficient demand to launch alternatives. In any case, there is a race on between Examining bodies to depreciate examination standards and get as many advisers through their syllabus as possible. In the past the Diploma exam was made up entirely of written examinations (usually three or four were required). The IFS Diploma now has one multiple choice, one written and some coursework. The CII have also introduced a collection of gap filling multiple choice exams. Clients of mine, whom I originally thought would have no chance of achieving the old Diploma standards have sailed through the IFS scheme. Most competent adviser should be able to pass these qualifications, those that won’t are either incompetent or are refusing to try out of pure stubbornness.

2. Experience is not necessarily a substitute for knowledge. I know plenty of advisers who have been in the industry for 20 to 25 years and still don’t have a decent level understanding of Financial Planning, Pensions or Investments. It depends on what someone takes from their experiences and how relevant that is to what that person does today. Fifteen years ago more than  80% of IFAs were probably selling, almost exclusively, Endowment Mortgages, With Profits Bonds and With Profits Pensions. This required little understanding of any investment principles, merely the  ability to compare simple tables of the products that were on offer.  The last ten years has seen a dramatic change in the investment advice that advisers are required to give. A sophisticate understanding of more complex investment ideas is required, not to mention Inheritance Tax and long term care planning. I honestly believe that are large number of advisers who set out in the industry selling general insurance door to door, are just not up to the job. To illustrate the point, I know an adviser who has been in the insurance industry for nearly 40 years. His previous jobs before joining the industry were, window cleaner and "selling towels out of the back of a van at the market". He recently bemoaned to me the fact that Insurance Companies don’t send consultants round any more to see him and tell him what he should be selling. This might be an extreme example, but it is representative of an element in the IFA community, who rely on Product Providers, not just for their remuneration, but also for what advice they should give to clients. This has been a major cause of miss-selling scandals in the past. The idea for Mortgage Endowments, Occupational Pension Transfers and Opt Outs originally came from product providers, filtered down through Tied Agents and IFAs, who were unable to decide for themselves whether it was actually a good idea or suitable for their clients. Advisers with 25 years experience, working in the industry today, are unlikely to have more "relevant" experience than an adviser who has been in the industry for five to ten years.

1. When it comes to remuneration, the sooner commission is banned, the better. Factored commission was originally introduced for small regular premium business. The insurance company would foot all of the initial costs (including advice) and this would be paid for through higher charges over the whole term of the policy. This was a reasonable solution, where the client could only save a small amount and could not afford to pay all the up front costs. This factoring should never have been translated to large lump sum investment business. It allowed advisers to pretend that the large commission they were receiving were actually just part of the normal contract charges, so it cost the client no more for advice. To illustrate my point, I came across an adviser a couple of years ago  who had convinced a client to allow him to take commission of nearly £35,000 from the investments he was arranging. Now it appeared that all the clients money was invested, so they felt that this was costing them nothing. In reality, the adviser could have taken £5,000 commission and the client would have been £30,000 better off immediately. There is no work that a financial adviser can do for one client, which is worth £35,000. This is the wages of a full time employee for a year! This is an extreme example again, but I routinely come across cases with commission of between £7,000 and £15,000. To put this into perspective, charging £100 per hour, I think most of the jobs IFAs do could be done for less than £2,000.  I have seen survey results about commission and even discussed it with friends of mine (not in the industry). The fact is that the majority of retail clients do not understand the connection between what the adviser receives as commission and what they are paying for their products. This lack of transparency enables unscrupulous IFAs (as demonstrated above) to dupe clients out of thousands of pounds of their own money, because they think they are getting something for free. The RDR proposals will force product providers to clearly deduct any adviser remuneration as a separate charge from a clients product. This can only be a good thing.

2. On a related topic, the Anti RDR brigade continue to pedal the lie that moving to a fee charging structure will mean VAT on adviser remuneration and therefore higher costs for consumers. Whether adviser remuneration is exempt from VAT or not has nothing to do with whether the adviser charges a fee or is paid commission. Commission is exempt, because the IFA gives "free" advice and gets paid for arranging the product (intermediation, which is exempt). If the same adviser took the same commission, but told the client they were taking it as payment for "advice" then that would be VATable. Commission is only exempt if advisers keep up the pretence that they give free advice. If a Fee charging IFA charges only for arranging a product, then it will be exempt too. Personally, it appals me that IFAs give away free advice (their most valuable service) and charge for arranging a product (which requires no special skill whatsoever), even if it does makes the charge VAT exempt. In any case, VAT on fees does not  necessarily mean higher overall cost. For example, if an IFA charges £100 per hour plus VAT, that would work out far, far less overall than our friend above who takes £35,000 commission.

I think this must give you a taste of the frustration those in the pro RDR camp feel towards the aims of the Anti RDR camp, which will just perpetuate the low expectations that consumers already have of financial advisers as  poorly qualified, over-paid salesmen. I would like the FSA to have gone further and completely banned any payment from product providers to advisers, with a fixed timescale for raising qualification standards not just to level 4 but to level 6 (degree level), say by 2020.

Perhaps some of these points will change your mind but, if not, I sincerely hope that MPs attempts to change RDR fail. Just so you know, I am a lifelong Conservative Party voter, so I am not just taking the opportunity to knock MPs from a party I disagree with in general. I honestly believe that RDR has the potential to change our industry for the better and ensure that clients can be more confident of receiving good quality advice from an impartial source, at a reasonable cost.

January 2011