The Financial Service Authority’s retail distribution review (RDR) may lack the wow factor of 1986’s Big Bang, but it’s having a far greater impact than its pedestrian title may suggest. Commission is out, qualifications are in. Clarity and transparency are the name of the game, with consumers the intended winners. Firms offering financial planning advice are quietly confident the changes will play to the strengths of the accountancy model and benefit their business.
Something needed to be done to make sure consumers would be given objective advice on their investments – advice that was clear and understandable
The biggest shake-up under the new rules, which come into effect on 1 January 2013, is that financial advisers won’t be able to charge commission for advice on investment and pension products. They will only be able to charge a fee, agreed in advance with their client, for their work.
RDR makes it easier for consumers to understand financial advisers’ motivations. At present advisers can be tied agents of a single product provider, multi-tied agents of a panel of product providers, whole-of-market advisers working on commissions, or independent advisers. In the future, firms will be simply independent or restricted.
Trust in the financial services industry is at an all-time low, reeling from mis-selling scandals. "Something needed to be done to make sure consumers would be given objective advice on their investments – advice that was clear and understandable," says John Gaskell, financial planning and advice manager, ICAEW Financial Services Faculty.
Changes are already sending shock waves through the sector, with some of the bigger providers, such as high-street banks, limiting their advice or stopping it entirely. This reduces services available at the lower end of the market. "From the consumers’ point of view this is slightly worrying as there will be fewer people out there giving advice," says James King, partner at Price Bailey.
Many investment advisers are targeting high net worth individuals. Few seem to be looking at increasing their offerings to the mid-market. Richard Bertin, managing partner at FF&P Wealth Planning, says this bracket may resist advisory firms charging fees. "High net worth individuals are used to paying fees for tailored financial advice. The mid-range of the market isn’t, as they’ve been paying a hidden fee in the past." Mid-income consumers are buying into passive products with low fees as a result.
The balance of power
Changes in fee structure could have unexpected consequences for investment advisers by shifting the balance of power away from providers. Commission amounts were decided by the product manufacturers. "Now there is no commission bias, why should the product providers dictate what the advisers earn from giving advice?" asks Bertin.
The RDR generally applies to advisory services only. This may lead to a skew in the marketplace as services such as execution-only will continue to receive commission. Neil Messenger, partner and head of financial planning at Grant Thornton, thinks this may send clients into the arms of execution-only platforms in the mistaken view they are not paying fees. "If I recommend a client takes a portfolio and I charge x% per annum, the client may go online and buy this portfolio themselves and think that they’re saving by not paying us an annual fee for the service," he says. "In reality the fees could be higher as the charging basis is opaque. What’s more they’ll be receiving no service for their money."
A third main strand of the RDR is for all retail investment advisers to possess higher minimum qualifications and comply with improved standards of professionalism. FSA-accredited bodies – ICAEW is one – will have to verify that members who are advisers have met new qualification standards, abide by the FSA’s regulatory regime and undertake the necessary mandatory CPD. Advisers will also be subject to the code of ethics and disciplinary procedures of their accredited body.
The changes aim to end the cowboy-type tactics used by the financial services industry in the past. King believes this means the financial planning world will be viewed far more as a profession than it has in the past. "Everyone will be better qualified, everything will be more transparent and people who perhaps ought not to be in the industry will go."
Accounting practices up and down the country have been offering wealth management services for years, out of their accountancy practices or via a separate limited company. Whatever their transmission mechanism, these firms are broadly happy with the changes. They have generally been providing fee-based independent advice for years, so ending commissions will level the playing field between them and other financial advisers.
"I can’t see RDR being anything other than positive for a professional organisation," says Messenger. "It will drive a competitive advantage because we’re in the right position: many of our competitors operated with a lack of transparency and their charging structure will now become more visible. Their clients currently have no idea what they’re paying for their services or how they are being charged."
The RDR marks a move towards a professional practice model, emulating "what already exists in the culture of ICAEW and its members", says Gaskell. "Given the loss of confidence in the financial services sector, the accountancy profession is well placed to engage with those who need independent financial planning and investment advice."
Everyone will be better qualified, everything will be more transparent and people who perhaps ought not to be in the industry will go
Some accounting firms may not have the critical mass, or inclination, to get FSA approval to deliver investment advice. Gaskell says they will still have to find a way of gaining access to advice from a trusted financial adviser to help their clients. "Sticking your head in the sand is not an option. Clients need access to reliable advice on their personal finances, particularly small business owners and the self-employed where the boundaries between business and personal finances tend to merge."
Referrals to financial advisers by ICAEW members will continue to be governed by ICAEW’s code of ethics, which will be updated this year to reflect the changes brought about by the RDR.
The ethic of it
Ethics and integrity manager Elizabeth Higgs says the basic principles will stay the same. "Only the terminology is being updated," she says. Under the revised code, ICAEW members will not have to take any action if they refer work to an independent adviser. If they refer work on to a restricted adviser, they will have to assess its suitability and ensure it can cover most of the market products and providers relevant to the client’s needs.
If a firm becomes a specialist adviser will it have to be restricted rather than independent? No: the FSA stated that a firm which offers specialist advice in a narrow market can do so either on an independent or a restricted basis. "Just because you’re only looking at annuities, for example, doesn’t mean you have to be restricted," Gaskell says. "If however you were only looking at a restricted panel of annuities, then you would be a restricted adviser too."
Firms considering moving into financial services need to be aware of cultural differences between financial planners and chartered accountants. King, a financial adviser, oversaw Price Bailey merge its financial planning and tax teams in 2007 – a move he says forced both sides to learn about the other. "They’re quite different. The tax side works towards an end answer whereas with financial planning you’re always looking towards the unknown future."
If firms can merge the two ways of working, clients will love the idea of coming to a one-stop-shop accounting, tax and personal finance service. "It’s all about trust within the business," says King. "My tax colleagues trust my team but that didn’t happen overnight; you have to constantly work at it and come up with ideas and push things and make things happen."
The ICAEW Financial Services Faculty’s support to members and member firms operating in this sector of the market includes a monthly magazine, FS Focus, and regular events and webinars.
A one-day financial planning conference, chaired by Justin Urquhart Stewart, will help members and others take advantage of the opportunities presented by the retail distribution review. Taking place in London on 17 September.