Retail Distribution Review

Written evidence submitted by Paul Scott, Scott Financial Ltd

1. I feel compelled to have my say on the RDR subject. I have read considerable comment from adviser magazines, I’ve also read the reviews on the parliamentary debate and I have tested opinion from my own client bank. I haven’t seen any legislation that is so universally disliked by all and potentially damaging.

The FSA appears to hear the critics from all sides yet seems determined to continue un-swayed. I understand the FSA’s objectives.

· Higher education and Professional qualifications are a reasonable target.

· Eliminating potential product bias from commission is an understandable concept; after all different providers pay different commission rates.

The FSA have decided to impose a new retrospective minimum qualification for all advisers regardless of experience.

The FSA have also decided to ban all commission/fees paid from product manufacturers direct to the financial advisers. Instead the adviser must charge a fee direct to the customer.

2. Qualifications

I am a Financial Adviser with 21 years experience and a zero complaints record. My clients seem to be quite neutral towards my professional qualification and certificates. However they are very interested in my experience and reputation. I am not sure as to the benefit of putting my older colleagues through new qualification hurdles. Having taken the exams I feel no richer for the experience. The exams test formula, calculations and memory. In reality we use computers and websites. It’s an okay exercise in your 20’s when you’re at college or university however after 20 or 30 years experience it is a tedious and expensive exercise. Having said that these retrospective qualifications are not the major issue for me.

3. Retail and Advice

Much has been made of comparing financial advisers to solicitors and accountants. They are paid via pre-arranged fees. The problem is that our advice predominantly results in the arrangement or increase of a financial product. This is retail. The comparison is not logical.

4. Much of my work is pure financial advice; however much of my work is retail. This is marketing, sales and arrangement/set up of financial plans. This is retail not advice. At the moment this element is paid by the product provider (investment, pension, insurance etc) it is paid via a fee or commission from the provider or product provider. This element is to be outlawed by the FSA. How can this be a Retail Distribution Review if we are no longer allowed to be paid for retail? We are now supposed to call this advice and charge it as an advice fee direct to the customer. This is ludicrous! The pension or investment provider manufacturers the product and it will now "magically" get from manufacturer direct to my client without advertising or marketing, without cost to them, without any mark-up. The client never meets the manufacturer, we produce the literature, the software, the plans are set up and the paperwork is completed in my offices, by my staff, all for free! We document and guaranteed the arrangement all for free? I don’t understand it.

5. Advice is a completely separate issue. Clients should have the option to pay for advice by a fee. We already offer the client the choice to pay us via a pre-agreed fee or indirectly with the provider paying us a fee or commission. We have 95% of clients selecting the commission option. It’s not difficult to understand why. Few clients feel comfortable with the logistics of the upfront fee. With the commission option the "provider" cash flows the client by initially funding the financial adviser. The amount is recovered from the client however it is recovered over many years. Experienced and qualified financial advisers are not cheap. The advice and arrangement of a seemingly simple product takes an enormous amount of time in this litigious world. Example, few mainstream clients select a £780 up front fee compared to the comparable commission effect, (example £15 p.m of extra charges for 5 years).

6. The rare exception is some of the more wealthy clients. They are possibly more experienced in a fee paying professional environment and are comfortable with the overall lower cost of paying up front. The clients universally select the commission option however the FSA intends to remove this option.

7. If, the objective is to remove product bias, why doesn’t the FSA simply insist that all product providers pay exactly the same commission rates? Surely it’s simple. If this is unacceptable (I can’t think why) then I want the right to be paid for the retail of a product separate from the advice. If I do the work for the product manufacturer/provider, then they should pay me direct, not the client. The client can then pay a smaller fee to me separately for the impartial pure advice – simple.

What will be the result of the RDR in its current format?

8. Financial Advisers are an ageing group. We are severely over regulated and swamped in bureaucracy. Unlimited claims liability makes this a worrying profession and profit margins are reducing each year. New blood is simply not joining the industry.

9. As a result of this legislation my older colleagues are planning their retirement. I am in my late 40’s. My business is preparing the restructure of our client bank to focus on much smaller number of "A" clients. We feel these people will find pure fees less offensive. We will cut our costs via the administration savings from having much fewer clients and we will make staff redundancies. I have field-tested the pure fees concept with my B & C clients and it simply isn’t going to work, in fact it produced quite universal offence.

10. The industry will definitely shrink significantly with potentially un-repairable damage. If we are purely paid for advice, there is no incentive to actually arrange anything at all. There will be a new world of simple-advice only, with no actual action. It’s important to understand that many Self employed clients need a pension however they sometimes need a rather firm nudge.

How do I feel?

11. My wealthiest clients are not necessarily my favourites. I feel I will be letting many people down. It’s depressing that these middle clients have equal or higher need for quality advice. They will be consigned to generic advice from flow chart websites or unqualified commentators or simply no advice at all. My staff are like family, how do you think I feel about redundancies for no purpose?

12. Industry complaints will rise dramatically, consumers do not like change and they don’t like the removal of choice. Clients will buy direct and the next major issue will be a mis-buying scandal. The FSA will be responsible however they will already have been disbanded.

13. We the advisers are flexible, we are great survivors. We have endured this poor regulator for many years and we will adapt. This will however be the industry’s worst disaster since the FSA’s introduction of Stakeholder pensions. The Stakeholder was the first charge-free pension. It was well meaning but it has been a complete disaster (accepted by all). The private pensions industry has never recovered from the legislation and a huge pension gap was created in private pension planning.

Please Listen, Rethink, Compromise.

January 2011