Paying commissions will soon be a thing of the past.
Are you getting all excited about the RDR? Are you agog at the prospects for this brave new world of financial advice? What do you mean, you've forgotten what RDR stands for?
If you don't know your RDR from your FDR, here's a quick refresher. RDR is the groovy financial services industry acronym for Retail Distribution Review, and before you die of ennui, here's four words explaining why it could matter to you.
RDR will abolish commission.
So farewell, commission
From January 2013, financial advisers will be banned from charging commission for selling financial products. Instead, they will have to charge their clients a fee.
At a stroke, the Financial Services Authority should do away with the one single factor that has underpinned almost every mis-selling scandal over the last 25 years, as I wrote here last year.
Close the door on your way out
Plenty of financial advisers will rue the day commission died. Some of them I have no sympathy for. They're the ones who made fat profits by mis-selling commission-based personal pension transfers and a host of other under-performing investments, including precipice bonds, with-profits bonds and endowment plans. Many are quitting the industry, now the easy pickings are over.
But I do have sympathy for honest advisers (the large majority). One reason nine out of 10 financial services products were sold on a commission basis is that their clients wouldn't have bought them any other way.
Getting people to pay money into a pension, ISA and insurance plan isn't an easy job, when there are so many more exciting things they can do with their money. Charging them a fee on top makes a tough task even more daunting.
That's why most advisers bundled their fees into the cost of the product. Clients liked it, because they didn't have to write a separate cheque for advice, and could deceive themselves that the adviser got paid through some magical form of osmosis.
Unfortunately, this gave the green light for the financial services industry to try a little deception of their own. Since the industry is more than happy to jump a red, especially if there is a banker at the wheel, this had them revving their engines.
Banks and insurers pumped out investment bonds paying whopping commission of up to 6%, giving advisers a massive incentive to choose them over, say, a vastly superior investment trust that paid zero commission.
A few years ago, my girlfriend was briefly friends with the wife of financial adviser. I remember the woman's glee when she told us how some elderly lady had walked into her husband's shop wanting advice on investing a £200,000 inheritance.
It was 2007, when the average initial investment commission was 5.6%, according to FSA figures. The adviser could have trousered £11,200 for just a few hours work. No wonder his wife was chuffed.
That £11,200 would have come from the little old lady, not the investment company. If she had paid an honest hourly rate, she would have paid just a few hundred pounds.
Burying adviser fees in the product details caused other distortions.
Take the initial fee of between 5.25% fee charged by most unit trusts. Some 3% of that is earmarked as commission. The trouble is, you pay it even if you buy direct from fund manager, without any advice at all. The manager simply pockets the fee themselves.
True, you could get round this by purchasing the same fund from a discount broker, but too many investors didn't know this, and paid a high price for a service they never got.
Four out of 10 advisers like it
Those days are now coming to an end -- hooray! -- and according to a new piece of research, plenty of advisers are also happy about that. Just over four out of 10 advisers think the RDR will improve the financial advice given to consumers, according to new research from Skandia. And half of those said the main reason was the ban on commission.
That said, three out of 10 say it will have no effect, and a similar number claim it would have a negative effect. That may be down to the strong resentment many advisers feel towards RDR, which will force them to spend valuable time sitting dreary exams to meet the new standards.
Who will manage the poor's wealth?
Skandia claims the research has abolished the myth that most advisers dread the day that commission dies. I have certainly spoken to many who have embraced the change, rebranding themselves as wealth managers or new model advisers, and cheerfully persuading their clients of the benefits of paying a fee.
They may charge fees in different ways, ranging from a flat hourly rate, to, say, an annual charge of 1% of total funds under management (with initial fund charges rebated). Either way, it will be much more clear and transparent for their customers.
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Whether customers will welcome that is a different matter -- many will have been happier pretending the advice cost them nothing.
There is one big drawback. As their name suggests, wealth managers will only help the wealthy. You can't offer advice for 1% of funds under management if the client only has, say, £5,000, while a novice investor wanting to buy their first stocks and shares ISA may be reluctant to write their adviser a cheque for several hundred pounds.
The danger is they will nip into their bank instead.
Retail distribution retirement
Another worry is that adviser numbers will fall sharply, squeezing the availability of advice even further. As many as 10,000 out of 30,000 advisers could quit, according to research from Ernst & Young.
Some of these will be daunted by the new higher level qualifications, others are simply too old to make the change and will take early retirement, and I suppose some just won't be good enough.
I suspect this figure is a little inflated. When they have finished feeling sorry for themselves, most advisers will gradually fall into line. That's how big reforms usually go. Afterwards, everyone will wonder what the fuss was about.
Skandia's research put the number of departing advisers at a measly 6%, that's 1,800 out of 30,000, while only 4% say they have been forced out by the new demands of the RDR.
In fees we trust
I do sympathise with honest IFAs who have been diligently looking after their clients for years and now have to jump through FSA hoops to do pretty much the same job.
I'm just glad there is no such thing as an RJR -- a retail journalist review.
That said, the death of commission should dispel a shadow that has been hanging over the industry for too long. It will also create a more level playing field for investments, with low-charging investment trusts likely to be one of the biggest beneficiaries.
Now that could be something to get excited about.
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