Our RDR response - split advice, sales, and fees

Response to Interim Review of Discussion Paper DP 07/1 submitted by

Aisa Direct Ltd

We previously wrote in November with a response to the above Discussion paper. We would now like to comment on the interim paper from last week.

You would expect as we are an IFA firm with the majority of our advisers already qualified to DipPFS, who operate whole of market and a fee option based model, that we would support the RDR interim review. 

In our original response to the FSA we argued for a simplistic model that the consumer could understand and, at face value, splitting sales and advice achieves this, and could provide greater clarity.

However, I have to question if this is good for the consumer. I have heard it described as a victory for logic or common sense, but I must say for whom?

Simply having higher technical qualifications, especially if not relevant or not supported by experience, do not assist the consumer unless they are supported by other facets. St James Place states it sells sophisticated products for inheritance tax and pensions, has 19 external fund managers giving it broader access to investments than many IFA firms, and already has staff with higher qualifications. Ignoring for one minute that Inheritance tax advice is not regulated, why should they not be seen as advisers under the new regime?

I accept the logical answer is, whilst clearly there are some excellent advisers at St James Place, the reality is that it’s associates, in order to get paid, have to fit their advice to suit the restrictive products available to them. It is difficult for them to get paid for advising on another company’s products that may be better suited to the client, but would result in no payment to St James Place. However, could this ‘logic’ not be levelled against IFA’s who operate on restrictive panels, preferred commission agreements and/or are part owned by particular insurance companies with agreements for minimum business levels? Would an IFA advise on a product from St James Place if they do not pay the adviser?

It seems illogical to me that St James Place would be prevented from calling itself an adviser, whereas firms part-owned by self-interested providers, or receive preferential pay rates from panels or through third party client support services, can be called independent advisers!

This leads me to where I am so disappointed with the RDR interim report. Far from benefiting the consumer, and actually splitting advice from sales,  it is stating that IFA’s can see themselves as ‘professional’ by obtaining a few additional qualifications and determining remuneration agreements without product provider input, whilst the product providers can continue to pay commission or have ownership of IFA companies. Are we supposed to believe that this is likely to lead to true ‘advice’ being given to the majority of clients without the knowledge that there is still a commission payment at the end of it?

As for the majority of consumers, who pay insufficiently, they will be left with second best – a non-advised sales channel. I understand the self-interest but should 83% of IFA’s really be supporting this interim review uncritically?

Fact – we have a declining savings culture and we probably already have insufficient advisers. The demand for pensions advice alone could be severely restricted through a combination of high demand by 2012 and also RDR.

We have to encourage advice on every level and our own business model is designed for a minority of the public, whilst the majority simply cannot afford it. You would be pigeon-holing more advisers in the minority advice area.

What is the solution?

I would agree that any firm that has a limited product range, even with high qualifications, cannot give complete advice and so it is sensible to put them into a ‘Restricted Advice’ bracket, or whatever you deem a suitable term.

Ultimately though, everyone will go for the independent route, especially if you allow firms to continue to have part-ownership or limited advice panels – in other words they will claim independence even if ‘governance’ is actually from a self-interested third party.

Therefore, I would advocate that the only way to get round this and many other problems (such as suggestions of a maximum commission cap) is to rule out commission for Independent advice as was originally proposed or go to factory gate pricing with CAP. It is true that factoring could still be allowed.

Ultimately, this sorts out so many of the issues – true independent advice must be completely dis-connected from payments from providers and I believe that the RDR review has gone completely the wrong way in allowing commissions to continue for all advisers.

Other advisers, whether it be part-owned FA’s, tied agents, multi-ties could be grouped in ‘Restricted Advice’, and they could be encouraged to offer fee’s as well.

This would allow far greater advisers to be available to the consumer. Yes, it would present one problem, that being tied advisers would be in the mix with advisers who were currently independent and offered far more products. Surely this would encourage more advisers to seek independence ultimately?

Of those left, many would after complaining about companies like St James Place, actually go and work for them! – would this not benefit the FSA by less small firms and greater compliance within larger groups?

Examinations – yes, all advisers have got to maintain the higher standards whatever their status. I still believe that Chartered status should be the ultimate goal over a longer time period, especially for independents.

Restrictions – Yes, it would be much clearer to apply restrictions on specialist areas by following my ideas. Simply put, an IFA would be able to advise on matters unrelated to products including for example IHT or company matters including pensions. If you were not Independent you would not be able to advise on such areas for example. It really would simplify all matters and allow advice to be truly separated from sales.

Time period –There is more to professionalism than qualifications.  We believe that there is also a need to recognise the importance of experience and practical knowledge.  Indeed, it is our view that offering consumers the option of seeking out advisers with ‘qualification’s or ‘experience AND qualifications’ will be an important part of building trust between consumers and the adviser. There should be a minimum period of individual being qualified at the higher level.

Direct business - In our previous letter we commented on Execution Only or ‘Direct’ business. Consumers have little rights and it is often sold as ‘free’ or ‘cheap’ when it is anything but. We have much anecdotal evidence from clients that they make horrendous mistakes which they then accept as having no recourse for. This has got to be stopped in our opinion, and our suggestion would stop this; sales would still be advised.

Ongoing Servicing – many firms (especially execution-only) are making 0.25% or higher amounts every year for doing nothing more than forwarding a fact fund sheet, or simple discussion document that you could find in a newspaper, which in no way could be deemed interactive or ongoing advice, other than in their minds for justification of service.

Large Companies – Governance – is it acceptable for a firm the size of Hargreaves Lansdowne to be able to call itself independent simply because the majority of its advisers hold the equivalent of DipPFS? You could have 3 advisers in the whole company and they would all have DipPFS making it an independent dealing with tens of thousands of clients, clearly not on an individual basis. Is Hargreaves Lansdowne advising on St James Place products for example or does it simply ‘push’ its own products and a few selected other companies. Therefore independence must have some notion of actual advice! Rather than by % of advisers qualified!

Conclusion

Clearly the FSA are listening! Thank you.

In order to maintain the broadest scope and simplicity for consumers you have in the interim report gone for the options that increase qualifications, and maintain the business models of the majority of advisers.

Have you gone too far in pandering to us Independent Financial Advisers?

I believe that you have! I believe that you cannot rule out bodies such as St James Place, much as I dis-like them as a competitor, they are essential to maintain availability of advice to the consumer. Likewise there are too many IFA’s who are not, like so called independent firms who never provide advice, or do it on a minimal basis for a few clients, such as Hargreaves!

Separating advice and sales will only be successful if you separate payment and commission from self-interested third parties. True independence must incorporate this, whilst ‘Restricted Advice’ would be available from the remaining advisers who were not independent (which is wholly logical even for those existing semi IFA’s).

Qualifications are a must for all advisers – it is no use having one adviser qualified in a firm, allowing all other advisers to continue to operate. The individual adviser must have the individual qualification! And governance surely dictates that the majority of those people in an independent firm must hold that minimum qualification standard.

Kind regards

James Pearcy-Caldwell - Director