David Thompson, managing director of marketing and distribution at AXA Wealth, looks at the role product providers and platforms play in creating new charging structures
With the implementation of the Retail Distribution Review now only a few months away, it is impossible to open a financial services trade magazine or click through the online publications without reading significant commentary on the various aspects of the changes ahead.
One of the key elements of the RDR, and the one likely to have the most impact on adviser business models, is the move to a more transparent way of clients paying for advice. The principle of adviser charging continues to receive a high level of debate and comment.
With effect from 31 December 2012, advisers who set the charges for their services as commission on new business, as we well know, will no longer be able to. An adviser’s charges will, in future, be determined by the level and type of service provided without, as may currently be the case, reference to products and commissions. Charges need to be disclosed to and agreed by clients early in the relationship and a service must be provided for any ongoing remuneration received.
How to prepare a remuneration model
For a small part of the market – the non-commission paying offices of the past – this concept of adviser charging is not a new prospect. Post-RDR there will be a number of payment options for clients. For example: products will be allowed to facilitate the payment of an adviser’s charges or the client could pay the agreed fee directly to the adviser.
While this latter method may have the advantage of clarifying what the client is paying for – the adviser’s knowledge and expertise – and this is the basis of the relationship, both options are valid and advisers need to consider what is the most appropriate for their clients and their business.
A range of research highlights that there is resistance to paying directly for financial advice, perhaps based on the misconception that in the past it has been ‘free’. Even where there is an understanding that there is a cost involved the amount people say they are prepared to pay is unrealistically low.
It is important to note that there are many advisory firms with clients who already pay fees directly and so this issue must be one of education, with advisers understanding the needs of their clients and developing appropriate services.
It is now becoming clear that not all platform operators and product providers will be able to provide the same level of capability and flexibility with regard to adviser charging, especially as far as legacy assets are concerned.
In addition adviser charges taken in respect of new business via products may have tax or other consequences for the client, and again, may be a factor in deciding how to charge for services provided. For example, with a new life bond investment post-RDR any adviser charges taken will count towards the 5% tax deferred withdrawal figure certainly in respect of ongoing remuneration and assuming an initial gross investment approach. It is worth noting here that new business means not just new contracts, but also increments to existing policies.
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