RDR Roadblock
Vast swathes of consumers in the UK prefer an adviser to receive a commission payment over having to personally pay an adviser fee – this is where RDR will fall down.
There has been a great deal of holier than thou gesticulating among advisers in Britain over the past year or so, largely from those who espouse fee for service.
On the one side advisers who already charge, or are transitioning to, a fee for service model – so-called New Model Advisers – and on the other those who are largely remunerated by the products they sell.
In an ideal world, fee for service would be the way to go; removing the potential for advice to be swayed by the payments on offer from product providers, however in reality fee for service will close the door for thousands of British consumers who neither have the ability or inclination to pay a fee for financial advice.
New research from CoreData Research reveals that very few investors would be prepared to pay more than 1% of their level of assets to access an investment administration platform and receive advice therein.
Therefore how much would an adviser need to charge a client to economically justify having him or her as a client?
We predict around £2,500 – to cover the initial cost of setting up an account, conducting a thorough fact-find, building a financial plan, walking the client through the plan, undertaking the asset allocation and placement of investments, regular monitoring of performance, and an annual review with the client to assess their positioning and ongoing strategy.
However if few people are will to pay more than 1%, and remembering that our research has revealed a large proportion would not be prepared any more than 0.5% of their asset level value, then advisers would only be attracted to clients with between £250,000 and £500,000+ of net disposable assets.
So $250,000 would be the cut off for clients willing to pay 1% and £500,000 would be the limit for clients who are prepared to only pay 0.5%.
This is a scary prospect.
Two thirds of British investors have net assets below £250,000 – and this is only of the people who are active investors, this doesn’t even include the many millions of people who are not actively investing.
Our research also reveals that 64.1% of these people are not inclined to invest through an adviser but are more inclined to do so directly – that’s quite a shrinking pool of prospective customers in a post RDR world.
Only 16.9% of active investors have a dedicated financial adviser, with 18.9% using them from time to time.
This is a major problem for the 25,000-30,000 advisers out there chasing business.
Advisers aside though, the big question is what will happen to the few million people who were prepared to engage with an adviser pre-RDR but who are now shut out of the market because they can’t afford what it costs to receive advice post-RDR and are simply economically unattractive to advisers as prospective clients?
Will comparison sites or banks fill the void? Burningpants shudders to think.
RDR will have to be tweaked before it’s full roll-out in late 2012 otherwise it could in theory damage the lives of the many consumers it was meant to protect in the first place.
Perhaps there is a supplementary legislative structure whereby complete transparency and disclosure with ‘opt-ins’ from clients allows advisers to still recoup some or all of the costs of the advice process from the product manufacturers themselves.
If not many, consumers could be left hanging in the breeze and a large proportion of advisers will be out of business.
5 Comments on “RDR Roadblock”
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Jonathon Clark says:
Nice to see the essence of the problem being voiced so clearly from 10,000 miles away! It is also an illusion to think that getting rid of “evil commission” will resolve the problem. I suspect that it will only be a matter of weeks after RDR starts before the first stories appear about the scandal of “extortionate” fees charged by advisers……The means of payment is only the mechanism – there are many honest advisers working on a commission basis and there may be (for all I know) advisers who are less than 100% clean who charge fees. Integrity does not depend on how the money changes hands.
Byron says:
I would agree with this article and suggest that all product providers look at their pricing model with a variety of methods of providing the same commission benefit for each product based on MER inclusive of adviser fee, deducted at the source on a monthly basis even if paid upfront. ING One Answer Platform Nil Entry Fee is a good example of this method and it does not unduly cost the client. More of the less fortunate potential clients would benefit from this structure.
Caring Industry Participant says:
I hope that we do not, in Australia, make too much comparison on the UK market’s eperience to support our debate.
The UK market has a commission debate much deeper than ours. In fact I would say that they are experiencing the break from ‘Insurance Salesman’ to Financial Planners and the industry is maturing, we have already done that.
Our compulsory superannuation structure has made it possible for Financial Planning to really flourish, an opportunity not afforded in the UK. To my knowledge advisors are still taking up to 75% of a clients annual investment amount into superannuation as a commission. Planning practices in the UK are typically based on large transactional client bases with little ongoing revenue.
Our commission debate is at worst turning a trail commission into a trail advisor fee, dictated by the client/advisor relationship.
Clients in Australia have already being paying fees and been willing to have paid them, that is of course if they were disclosed properly. We are only faced with using products that don’t dictate the amount we get paid.
If you got paid 0.6% yesterday in a bundled product and use an unbundled product tomorrow but still get 0.6%, what is the difference.
WE need to give credit to the Australian investor. They are willing to pay, they have been paying as nothing is for free. This is our debate not the consumers
Michael says:
I suppose this leads into a few issues:
* Should Adviser fees be tax deductible / have a tax rebate applied to ensure all Australians have access to Advice?
* Should there be a ‘scheduled’ fee, with Government rebate, i.e. Doctor and Medicare, with client / fund taking uo the balance? Or is Advice / Retirement Planning / Insurance / Wealth Creation / Estate Planning not ‘essential’ services?
The bottom line is whether Financial Adviser and the Advice they provide a service valued to the Australian Public.
We have considerable compliance costs / time placed on us as Advisers to supposedly remove the ‘bad apples’ and protect the consumer, would the compliance / audit regime all adviser submit to not REMOVE this issue of biased advie?
What we all need to remember, is that whether you / client / person is the 60′s retired / pensioner couple or 19 year old in his first job, or gent in his 50′s on an Income Protection claim I saw yesterday, they all value my advice, as they are aware that….”One does not plan to fail, one fails to plan.”
Thanks
Michael
Harry Katz says:
This is purposeful and stubborn stupidity. It is nothing to do with being Holier than Thou and everything to do with taking the trouble to engage with and understand the proposals.
Hard disclosure has not been a success and it is the product providers, the advisers and the Regulator who are to blame. If the disclosure document was one page on which the amount of commission was stated in 14 point type in bold then perhaps we wouldn’t be where we are. Instead the remuneration details have often be found buried on page 22 in tiny type of a verbose, irrelevant and impenetrable disclosure document.
The proposals clearly explain adviser charging. Here the adviser can agree with the client – up front– what the charge is going to be. That charge can be deduted from the product, provided the client signs the appropriate ‘chit’ with the application. So a client will have the CHOICE – not only in agreeing the remuneration, but whether to have it taken from the product or paying by cheque.
Now please someone tell me what the hell is wrong with that?