After Julian Parrott outlined how the changes to the Retail Distribution Review (RDR) would affect ethical investors, Lee Smythe, managing director at Smythe & Walter Chartered Financial Planners, describes his thoughts on the matter.
The RDR changes will be implemented from January 1 and anybody wishing to provide financial advice will have to charge fees agreed with their clients, rather than rely on commission payments from product providers (although this will not affect the majority of life and health insurances which will continue to be able to pay commission).
Financial advisers will also have to have achieved a level four qualification which has also meant that may advisers have had to spend considerable time over the last year or two topping up their qualifications, as many only ever held the most basic qualification required to practice (I have been a chartered financial planner for over five years, which is a level six qualification, and I am also a fellow of the Personal Finance Society, which requires additional qualifications on top of the chartered level).
The combination of agreed fees and better qualified advisers should, in theory (or at least the theory on which presumably the RDR was based) lead to clients receiving better advice with a clearer understanding of how it is being paid for. A noble notion and indeed at the more affluent end of the market clients will no doubt receive a better deal, from better qualified advisers.
However, many thousands of people now risk becoming disenfranchised from access to advice due to both a reluctance to and an inability to pay the levels of fees required for advisers to be able to operate profitable businesses. This comes at a time when adviser firms are also seeing the level of capital they are required to hold in their businesses increasing (again to protect the consumer) and so the focus is very much moving toward profitability.
The biggest danger of the RDR now seems that those who are unable to access advice will have to resort to ‘execution only’ services either online, or off the page, in order to purchase certain financial products. The irony here is that products purchased without advice can still pay traditional commissions to the people who arrange them, the result being that the less wealthy will still potentially continue to bear the cost of high commissions whilst not actually benefiting from any advice!
I’m a little surprised by the results of JP Morgan’s survey as I have been operating on a fee basis for a long time now and very rarely have I found a total reluctance to pay agreed fees rather than commission. I also believe that there will not necessarily be the wholesale “dumping of clients” as most IFAs still wish to provide a service to their clients, although I would anticipate a variety of different service levels to reflect the price being paid.
Lee Smythe is managing director of Smythe & Walter Chartered Financial Planners, based in the south east.