The popularity of direct to consumer offerings could be a threat to adviser businesses. Julie Hepworth, group regulatory manager at Perspective Financial Group, asks whether your firm is prepared
It is safe to say that the implementation of the Retail Distribution Review (RDR) will revolutionise the way that advisers operate from January, but beyond the headline changes such as the remuneration overhaul, there are plenty of smaller issues to consider.
Such has been the all-consuming nature of the shift to the new regime that it is understandable if advisers have overlooked some potential scenarios that could unfold next year, but it is advisable that they try and prepare themselves for every possible eventuality.
One such outcome that I have recently been contemplating is a potential increase in the number of clients cancelling policies during the statutory ‘cooling-off’ period when advice has been provided.
While such instances may be negligible at present, who is to say this will not change post-RDR as the direct to consumer market continues to grow and compete with adviser recommendations? It could well be the case that there is an increase in the number of individuals seeking advice from one source and the recommendation being implemented elsewhere as clients become more aware of what is on offer directly.
Of course, firms that have designed their charging structure so that remuneration is not contingent upon a product sale should be relatively insulated from any such trend, but firms reliant on clients proceeding to implementation stage should be aware of the potential pitfalls.
Another issue that could arise concerns possible refunds. Some providers might delay payment of adviser charges until after the cooling-off period, but where they do not and the right is exercised, will they refund gross or net of the adviser charge to the client? The FSA has previously confirmed that either method is acceptable (subject to any relevant HMRC and DWP rules) provided the client is informed in advance, but this is all extra information for advisers to bear in mind.
Things become slightly more complicated where consultancy charges are facilitated through group personal pensions that are auto-enrolment schemes as DWP rules then apply instead of the FSA cancellation rules. DWP rules require refunds to be paid gross, so if a consultancy charge has already been paid to the adviser, the provider would need to seek a refund of the charges from the adviser.
Given the complicated nature of such exceptions, I would not be at all surprised to see providers starting to withhold payment of adviser and consultancy charges to firms until after the statutory cooling-off period to avoid becoming involved in seeking refunds from advisers or creating a debit against the agency in an attempt to recoup the monies.
On top of this, they will not be keen to play the role of arbitrator in any possible contretemps between the client and the adviser.
With these facilitation complications in mind, advisers may well decide to seek payment directly from the client where there is no tax disadvantage to them doing so.
Removing reliance on providers to remunerate you as per the agreement with the client also removes cash flow delays that may result from any possible disputes. Where direct remuneration from the client is not possible, advisers must ensure their client agreement is robust enough to charge for the advice provided regardless of the eventual outcome, both at the point the service to be provided is agreed and retrospectively if the client subsequently decides to exercise their right to ‘cool-off’.
This may be a slightly different model to what many advisers already have in place, but scenarios such as clients changing their minds should try and be accounted for if possible.
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