Alan Miller, founding partner of SCM Private, encourages the industry to take action before a huge number of investors are robbed of independent advice at the very time they need it most
As the financial services industry faces the biggest tidal wave of change for decades, the Retail Distribution Review (RDR), many commentators are predicting the survival strategies likely to be pursued.
No one really knows the true impact but, at this early stage, it is the anecdotal evidence that should be listened to, not the somewhat self-interested research data and comments being spouted.
This is not an unexpected tidal wave. The plans for RDR have been six years in the making but what can be criticised is that the architects of this monumental plan do not appear to have factored in the altered financial and economic landscape, the shifting investor sentiment or the low return environment likely to remain for several years.
If the govt will not do it, we must do it ourselves
The many questions that have been heatedly debated over the past six years will soon be answered: Will the change be beneficial? Can it help rebuild shattered consumer trust in the financial services industry? Will there be unintended consequences? Will it work?
The reality is that the time for debating is over. Change is crucial and desperately needed. The savings and investment gap is widening and is set to widen even further. As a society, we cannot afford to fill the gap or sustain generations of failed savers.
My biggest concern is that the very act that was meant to improve the industry could do irreparable damage. We have an industry solely focused on satisfying the regulator and complying with RDR rather than what is best for clients. There is little clarity on process or best practice, there is little consensus on what constitutes advice, or risk, or loss, or discretionary management.
What is certain is that compliance costs, professional insurance costs and cost of doing business will increase; and the barriers to entry to any business wanting to challenge or augment its client offering will be so prohibitive that there will be very few new entrants.
The writing is on the wall for the IFA industry; RDR could kill off mainstream financial advice and no one at the regulator or in the government appears to be heeding the yellow or red flags.
When an estimated 50% of advisers are wiped out by RDR, where does the ordinary saver or investor turn; where are the lifesaving buoys? Where are the alternative solutions?
The advice gap
The FSA’s own figures (see table below) show a looming advice gap. Studies from the regulator have found that 63% of advisers “hope” to retain clients with £20k - £75K of savings and just 38% of advisers say they will advise clients with less than £20k in savings. To put this in context, that excludes the majority of savers in the UK. Industry data also shows savers are unwilling to pay for independent advice, meaning millions risk making poor decisions as a result of RDR.
These findings are backed up by numerous studies from elsewhere in the industry which suggests RDR could result in millions of savers being denied independent advice by the very regulation meant to open it up for them.
Deloitte also suggests the advice gap could affect around 5.5 million savers and Legal & General figures show that 64% of investors would stop using an IFA if they were charged an hourly rate, with 41% of savers saying they will opt for direct investment post-RDR.
The industry cannot allow the law of unintended consequences to mean that RDR robs a generation of savers of independent advice at the very time they need it most.
Also, in the longer term, rejecting smaller investors could be bad for business and IFAs will be restricting their client base if they only focus on the higher end of the market.
Indeed, in the longer term, smaller clients are likely to grow. How can IFAs adapt to accommodate these smaller investors, and how can the industry work together in ensuring a fair advice system and make RDR a success?
The only solution, now RDR has made full financial advice prohibitively expensive for many smaller investors, is to encourage genuine independent execution-only platforms. I would suggest a ban on execution-only platforms being allowed to sell ‘recommended’ funds, which are simply those paying them the largest commission.
Furthermore, ‘simplified advice’ rules should be much more simple and clear cut so that no-frills advice can be offered to smaller investors. Until the FSA/FCA faces up to these core problems, RDR is likely to produce more problems than solutions.
Drawing on a medical analogy, when you go to a doctor with an ailment you expect your doctor to resolve the pain, not say you need to have a full medical before they can resolve the issue. Why does the regulator insist on a full body scan when a patient just has a broken toe?
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress