Investors won’t get ethical solutions from most banks, so RDR is a double whammy
The Investors Chronicle recently claimed that under a new financial advice regime called the Retail Distribution Review (RDR), advisers across the UK will be “preparing to dump their unprofitable clients“ from January onwards. Julian Parrott, partner at Ethical Futures, explains what this means for ethical investors in the first of two professional perspectives published today.
Some advisers have a rather overinflated sense of their own worth – either that, or they are running expensive offices and cars!
Undoubtedly there will be collateral damage in terms of client outcomes as a result of RDR but at Ethical Futures, we like to think of ourselves as advising clients from all walks of life and economic backgrounds.
I’m aware of a number of firms (even in the specialist ethical field) that won’t entertain you unless you have a £100,000 of investable wealth. Firms are entitled to set out their stall in a way that suits them best, but much like the growth in term ‘Wealth Manager’ – which often just means the adviser has put together a model portfolio – I’m not very happy with this self-aggrandisement.
That said, the RDR changes are making advisers look at business costs more closely and when you consider the compliance cost and admin cost of putting together a basic recommendation, then it’s quite surprising what it actually costs to engage with a client.
We have carried out a detailed assessment of our costs and have put together a range of service offerings for our typical clients. On the basis of costs established – it’s unlikely that we can really advise a client for less than a £300-350 initial advice cost. Ongoing service will depend on requirements but will probably be at that level or higher as well.
This issue was brought into sharp focus when I recently had a request from a woman who worked for a voluntary organisation. Her employers were keen to start making their 6% of salary contractual pension payment to her before the year end. We had a meeting, looked at her situation and quickly established that she had no scope or resources for other planning issues and that a stakeholder pension was the best answer.
In the past, we have done these on good will and they would pay us commission. Closer inspection revealed that the appropriate plan would pay Ethical Futures the princely sum of £5.87 for advice in the first year and a recurrence thereafter if the plan stayed active. In the end, I waived my fee and asked the client for a modest contribution to administration costs. Clearly this end of the market is not going to be able to continue to get IFA advice, unless we decide to do pro bono days.
This is a shame, an unintended consequence of RDR and for the ethical investor, a double whammy, because they won’t get an ethical solution from most banks.
I think the key issue is in terms of positioning our costs – so long as client understands what advice and planning is about and what it actually costs to deliver then I think RDR provides a big opportunity. At Ethical Futures, we remain open for business to all comers.
Julian Parrott is chair of the Ethical Investment Association (EIA) and a partner at Ethical Futures, financial advisers based in Edinburgh.
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