Just back from yet another Financial Services Forum event on RDR and the implications thereof, and as usual I’m seething with anger and frustration – partly at the continuing confusion and misunderstanding that most people still seem to bring to RDR-related matters, and partly because of the collective failure of the FS imagination to be able to see any way that things could start to become very different as a consequence of it all.
This feels like two blogs’-worth of grumbling, with this first one focusing on the confusion and misunderstanding side and the second on how things could be different.
Much of this morning’s discussion, fuelled by some very confusing and misleading new consumer research findings, was to do with the already-flogged-to-death shock horror around the alleged danger that financial advice will be withdrawn from large numbers of modestly affluent consumers (the cited investable assets figure is almost always £50,000) with allegedly disastrous consequences.
As far as I can see, virtually everything about this panic – actually, perhaps it is absolutely everything – is wrong. Let’s count the ways.
1. As far as existing clients with £50,000 or less invested are concerned, IFAs definitely won’t want to rock the boat because for as long as the boat remains unrocked they continue to enjoy 0.5% of trail commission every year. The idea that they’ll be actively shedding all these little 00-Gauge gravy trains is ridiculous.
2. As far as new business from either existing or new clients is concerned, the fact is that the remuneration that most IFAs will be proposing post-RDR is in real terms exactly the same as it was pre-RDR: 3% upfront and 0.5% ongoing adviser charge. And under the Provider-Facilitated Adviser Charging regime, these amounts will be taken directly from the value of the clients’ investments, just as they were under the commission regime. Something conceptually important has changed: it is now the client paying for the advice, rather than the product provider paying with the client’s money. But in practical and financial terms, nothing has changed.
3. This can only mean one (or more than one) of three things about the previous commission regime: a) Intermediaries never realised how dreadfully unprofitable these clients were, but as a result of the analysis they’ve been doing in preparation for RDR they have finally come to understand the full horror of the situation. b) Intermediaries did realise that they couldn’t possibly make money on these numbers, so they tended to pile these low-value clients into very high-commission-paying products like investment bonds, where they could help themselves to a completely-unacceptable 7% or so of the clients’ money. c) They realised that they couldn’t make any money on these numbers if they actually did any work for these clients, so having once arranged the initial investment (and very likely pocketed the 7% initial commission) they then continued to trouser the 0.5% ongoing trail commission in return for doing no work and offering no service at all.
If any of these three things is, or rather was, the case, then you have to say that offering good financial advice to people with little money is fundamentally not viable, and the sooner it comes to an end the better it’ll be for everyone.
As I’ve said many times, people with little money rightly avoid top-of-the-market, high-cost advice in all sorts of areas. They don’t get their tax advice from PwC, or their interior decorating advice from David Hicks. When they get divorced. they don’t become clients of Mishcon de Reya. If they want advice on what films to watch, they get it from the newspapers and Time Out rather than personally from Lord Puttnam. They get holiday advice from Expedia, not Ranulph Fiennes. And they get advice on what car to buy from What Car, not an individual consultation with Jeremy Clarkson.
All of this is the least surprising news in the world, not least because in pretty much the whole of the previous paragraph I could have replaced “they” with “I”. Nearly all the time, we know that the cost of individual financial advice is too high to make sense for nearly all of us. But then, occasionally, we’re faced with something really difficult and important, and we decide we want the best advice, and we know we’ll have to pay for it: a freelance friend of mine is currently the subject of a full HMRC investigation, and although he hasn’t actually gone to PwC he has gone to a specialist accounting firm that won’t cost him much less.
The really bad news for people in the middle and mass market is not that all of a sudden no adviser wants to touch them, but is rather that for at least the last thirty years – probably longer – there has been no widely-available, sensible, reliable, affordable way for them to buy the financial services they need. There have of course been some good advisers serving this part of the market, and some good direct sales companies. But let’s be honest: not many. On the whole, most of the time, the only choice people have been able to make is by whom, and in what way or ways, they want to be ripped off: dodgy commission-driven product recommendations, excessive initial charges, excessive ongoing charges, consistently poor performance or a complete lack of fitness for purpose. (At worst, as for example in the case of PPI, for millions of people it has been all of the above.)
If RDR brings some new pressures to bear that accelerate the demise of this disgraceful era, I see that as an entirely good thing to be welcomed with the most open of arms. I simply cannot understand why so many others – including most at the event this morning – see it primarily as a Withdrawal Of Advice From The Mass Market shock horror scandal.