Retail Distribution Review

Written evidence submitted by Ross Perry, Independent Financial Adviser

Retail Distribution Review (RDR)

I would be very pleased if you could consider some points with regard to the above. These comments provide an alternative view to the ones expressed by Mr Hector Sants, Chief Executive of the FSA, in his letter to you last month.

The Prime considerations cited by the FSA are:

· Advisor Qualifications.

· Cost and type of remuneration.

As a "One Man band" independent financial advisor, I will be fairly typical of the large number of IFA SMEs located all over the UK.

I firstly put forward comments on increased qualifications.

I have spent the best part of 2010, trying to juggle the following balls:

· Running my business.

· Customer Reviews

· Studying for RDR

From the outset, I made it clear to the FSA, that incorporating study time would be difficult, and so it has proved. I have found all too often, study periods act as a conflict of interest to responding to client needs and requests. A full time student would have no such distractions.

Customers have to come first. My practice is very demanding. Customer’s reviews are in the main dealt with by preparing statements, and hand delivering them to the customers in their homes. This is the most popular service, requested by the customers. This is a good working ethic that cements a solid bond of trust with the customer.

Looking at this simply, if you see it through the customer’s eyes, If the advisor was to prepare simple to understand statements, and to be consistent in regular reviews usually annually, (but sometimes more often), trust automatically bonds the two parties together. This disproves the myth that customers are simply "sold to" and then the advisor goes on the run. More importantly, simple statements are in the form of:

1. How much money invested?

2. Current value of plans.

3. Where the value is taking the client (Important particularly for Retirement planning).

Furthermore, after 20 years of following this good practice, I have yet to find one single customer who has ever properly understood a product provider’s annual statement, thereby increasing the reliance of the customer on the advisor.

On page one of Mr Sants’ letter to you,(In reference to the table) there is a crucial omission, the level of complaints received.

I would recommend that in response to this letter, you request the number of complaints the FSA has information on, and break that down in a league table format showing whether the complaint is directed at the IFA, or at a Bank or National Organisation. The same breakdown should also be discovered on the examples given, pension switching, Unit Trust Vs equity ISA, Investment bond Vs Equity ISA and Personal Pensions.

I think you will see that the share of problems and miselling show the IFA proportionately as a minor sinner hardly seen at the back of the queue.

With regard to proposed RDR qualifications, the material change of the goalposts must have no parallel that I can see in any other industry. How can an individual who has been classified as competent, treats his/her customers fairly, is agreed as "fit and proper" to advise be threatened with extinction from 01/01/2013? If Mr Sant’s figures are to be believed, if only 11% of IFAs are forced to close their shops and offices, that could be up to 3 million customers not receiving a service that they have found invaluable for all those years. This has got to be wrong.

On the aspect of "Grandfathering", Mr Sant’s uses Mortgage Brokers as an example. This example is flawed, as it describes how 100 brokers were disqualified. The primary reason for disqualification has to be in disclosing false information on the mortgage application forms. If someone is dishonest, what difference does it make if they had more or less qualifications?

No one would dispute the desire to raise standards generally, but this is being achieved in any event, through continual professional development and the continuing experience achieved by customer reporting.

Other material Issues

I have been an IFA since 1989. In my entire career, I can think of no week, where we have not had to intervene of behalf of the customer to protect at least some issue (even if minor) that would be to the detriment of the customer and the benefit of the provider. This is why the customer will always be the customer to the advisor as opposed to the policyholder to the product provider.

The customer absolutely and rightly, expects the advisor to provide the best advice, ensures that the provider is doing the best by the customer, and that over time; the customer receives good value to their investment. With the continual improvement of web sites and the internet, I agree that more and more customers will buy directly, yet this simply increases the danger to the customer because gone is the "buffer" that the IFA has always provided.

I now turn to the other main argument, Remuneration.

Commission Vs Fees

There has been discussed and debated almost since the beginning of time.

The main complaint is of commission bias, yet I have not read yet anywhere in this argument the positive aspect of commission bias.

Example

A customer with a Small Self administered Pension scheme (SSAS) has £100,000 in the trustee bank account, gaining little or no interest. He or She is happy to invest the sum for at least 5 years, as they are not ready to retire for years to come. If that client pays a fee to the advisor, the advising firm could acquire on behalf of the client 109.5% starting investment allocation.

The investment could be set up on an establishment charge basis, meaning that £109,500 would be invested from outset. Say the cost of the advice was £500, subject to favourable performance less product provider charges over the term, the advisor has achieved brilliance. In RDR, this would not be possible.

I believe that the vast majority of IFAs explain fairly the difference between Fees and Commission. In RDR you remove the choice for the customer, with the result that huge numbers of customers will find advice unattractive or simply not affordable. My practice is in Gravesend, Kent. Gravesend is one of the poorest areas in the whole of the UK. I can think of no one locally who could afford say £200 per hour.

The only distinction between Commission Vs Fees is whether the customer chooses to pay for a service directly or indirectly. Ironically, abolishing initial commission tomorrow, would not hurt my practice, it would only hurt the consumer.

People these days hardly ever save regularly. They live in a culture where it is acceptable to have large uncleared balances on their credit cards, where banks are still charging 18-20% APRs in a 0.5% Bank of England interest world.

We have a huge void of retirement provision, few people saving, everyone living longer. The proposal for NEST, the new government pension plan is preparing to fail just like Stakeholder provision and the absurdly worded "Pensions simplification" legislation.

Sir, RDR in it’s present form is a disaster, and everyone with the exception of the FSA already knows it.

January 2011