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The Retail Distribution Review (RDR) may lead to higher
costs for consumers seeking financial advice and adviser charging
structures post-RDR will still involve deductions from the
customer's premium being passed back to IFA, according to our
new research. The research indicates that without regulatory
vigilance and genuine customer engagement, the current charge for
advice through commission payments may simply remain under a
different guise.
BDO conducted a survey of more than 280 IFAs, polling their
views on RDR. The findings suggest that the major – and
costly – changes to UK financial services regulation
associated with RDR may change very little in terms of direct
benefits to consumers either through lower adviser charges or more
transparent charging structures.
In total, 90% of respondents said that they expected IFA
remuneration to be as it currently stands or higher following RDR.
Pre RDR, on a client investment of £50,000, the average
initial commission charged by respondents was 2.9%, with an average
trail commission of 0.6% per annum.
Post RDR, the average level of adviser remuneration on a
£50,000 investment is expected to be an initial adviser
charge of 2.8% of the investment amount plus an ongoing adviser
charge of 0.8% per annum of the value of the investment as it
changes over time (eg a 0.8% per annum charge on £55,000, if
the initial investment accumulates in value by £5,000). In
short, whilst the initial charge falls slightly (0.1%), the ongoing
charge has risen by a greater amount (0.2%), meaning anticipated
higher remuneration for the adviser and greater cost to the
consumer.
In Total, 90 Per Cent Of Respondents Said That They Expected
IFA Remuneration To Be As It Currently Stands Or Higher Following
RDR.
Payment approach
Moreover, whilst RDR will signal the end of commission payments,
evidence strongly suggests that these will be replaced by a
structure which remains quite similar. 70% of IFAs, in considering
how they might receive their initial adviser charge, said that the
client would make a single payment to the provider with the
provider then paying the adviser.
There is consensus amongst IFAs that the most prominent form of
remuneration in a post-RDR world will simply be charges deducted
from the customers' premium by the product provider and passed
back to the IFA – just the same way as commission works
now. Unless customers take a much greater interest in information
shown to them than they do at present, there is a concern that
– for all the cost to the industry – RDR will
not make adviser remuneration any more transparent. What's
more, it is clear that IFAs believe that their income will rise.
Whilst RDR will certainly lead to a 'professionalisation'
of the advice industry, meaning better quality advice, a culling of
under-qualified IFAs and an overall higher level of service, it is
clear that it will place an extra onus on firms and the regulator
to provide clarity to consumers over charging structures.
Cost of advice
For those IFAs who intend to adopt an adviser charging approach
based on hourly rates, the responses showed an average charge of
£160 per hour.
Many industry experts have voiced fears of an 'advice
gap' growing, where pricing would prohibit all but the most
affluent consumers from seeking financial advice. The adviser
charging levels anticipated by IFAs would seem to lend weight to
these concerns. The fees advisers want to charge for advice seem
significantly higher than what we believe consumers are willing to
pay. Of course, advisers may simply be over-optimistic on the fees
they will be able to charge and transparency and competition will
force these down. The RDR is a major shake-up of the industry and
still has the scope to improve the quality and value-for-money of
advice. But its effect on the end consumer may be muted unless the
regulator takes a very hands-on role in the monitoring of adviser
charging structures post-RDR and in making sure that advisers and
providers make very clear to consumers how much they are paying, to
whom and in return for what.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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