Monday, 19 November 2012

Making a mockery of RDR

Today’s blog will be short and sweet but hopefully food for thought.

Much has been made of hidden commission payments and this idea that advice is “free” when in reality it is not. I thought it ironic when I met a representative from a VCT company last week. The conversation went like this:

“Great news we are one of the first VCT companies to offer an RDR friendly share class – we can even facilitate the adviser charge but of course there is no tax relief on this.”

My response “that’s great – so let’s get down to charges. I assume that now you are not paying any commission our clients will see a reduction in the normal 3% up front charge and 1.5% annual charge.”

“No, the charges will be 3% and 1.5% but of course if you don’t provide any advice then we can discount the initial charge, pay you commission up front and an annual fee.”

My response “okay so you are not paying us any commission, and yet you are not prepared to give our clients any rebates.”

“Yes, that’s right. The RDR rules allow us to continue to give commission to non-advised operations but not to you.”

My response “surely you can give the clients enhanced allocations, we are not asking for any payment but as you are giving kickbacks to direct platforms surely our clients should benefit as well.”

“No, RDR doesn’t allow us to to give any enhanced allocation or rebates in case you try and take your adviser charge.”

So here is the rub, we have a complex product promoted by direct platforms who take kickbacks and get enhancements when a complex product really should be advised, and any kickbacks should be passed back to the clients.

This to me is making a mockery of RDR, and not in the spirit of what should be happening.

Wednesday, 7 November 2012

What is a RDR? A changing landscape….

Over the last few weeks I have explored the issues around fees, and why individuals may consider advice versus DIY.  

Obviously I read a lot and it is clear that whether we like it or not the train that is RDR is traveling full steam ahead. My conclusion is that RDR brings to the fore some interesting discussion points which a number of people are missing, or perhaps don’t know how to tackle. 

A lack of savings

Recent ONS statistics showed only 14 million people contributed to a private sector pension in 2011, this is the lowest level since 1950. Looking at it another way this means 11 million employees are not saving for their retirement.

However, with the introduction of auto enrolment it is estimated that between 5 and 10 million “savers” will be created over the next five years, and that this will be worth £100 billion by 2050. Consider this, someone on the minimum wage paying the minimum into Nest will have saved £150 in the first year! 

A distinct lack of financial planning

Those hitting retirement today are faced with a number of challenges – low annuity rates and a rapidly changing landscape. Interestingly 90% of those retiring are opting for an annuity as the default option. 

I have said in other blogs about longevity – in 1980 a male retiring at 65 would expect to live a further 10 years, now it is 18 years. In fact a couple in good health at 65 would have a 1 in 4 chance of one of them reaching age 99.

To explore why people go down the annuity route is easy when you consider the average pension pot is just £18,000. Pre or post RDR individuals have little hope of getting any advice on this and therefore there only options are to buy what is offered to them or buy from a direct provider.

RDR is about survival of the fittest

I recently read this quote “it is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

If we consider the lack of savings; auto enrollment is a positive step but is it not just promoting a broken model that doesn’t reflect the changing environment we are in. Consider someone leaving school at 18 and perhaps going to university. At 21 they have a degree but debt, they then get a job. What are their priorities? Possible to pay down the debt, perhaps to save for a house? Auto enrollment may put them in a pension but actually it is not promoting the idea that the individual needs to take responsibility for their retirement planning, and why should they at 21?

When it hits the individual that they need to take control they might be in their thirties or forties and by then they are faced with a mountain to climb. If we consider the default Nest option, and possible other options. There is no advice, limited fund choice and a lack of portability. 

The second point to this is that we seem fixated on this mythical 65 retirement age. We hit 65 and we want to continue to enjoy the standard of living we had when we were employed, the problem is many have done nothing to save towards this. And who do we blame? The state for not providing an adequate pension in retirement. 

RDR will restrict those seeking advice for smaller sums to finding advice, to be honest this has already been happening over the last five years. To some extent costs are an issue but in reality it is the value of the clients assets and their ability to pay. So by that if the cost of advice is a percentage of assets managed then perhaps £50,000 is the threshold for advice. An alternative could be to write a cheque for advice but many people will not see the value of writing that cheque.

So the point is this we are moving to a situation where we need to take responsibility for preparing our retirement strategy and we need to do that early. If we don’t take responsibility for this then we are heading for a massive road crash.

And this is the point - RDR is a fantastic opportunity but the focus is about how advisers charge and what their service proposition is. It is clear that many people will fail to find advice and it is assumed (and I am one of those who assumed this) that they will take the DIY route - the problem with this assumption is that it assumes these people know what to do.

I say this because I believe that many DIY providers are treading a very thin line between advice and non-advice, and I wonder when someone starts to challenge this if it all falls apart. What do I mean by this? Some DIY provides outwardly state they provide financial education, when actually all they do is sell products and investments. Clearly people buy the products and investments because they are “recommended” by the provider, and not because they have considered whether they are right for them, this is the danger.    

You see RDR is what it is and it will split the market – we have assumed it will force people down the DIY route but we have to consider that many will simply do nothing until it is too late. I want to consider a child born today and retiring at age 70 (2082), will we be talking about a generation of poverty stricken pensioners because we had an opportunity to do something positive in 2012 but ill thought out legislation and too many vested interests destroyed any hope of delivering what is really needed.  

In conclusion the survival of the fittest relies on individuals realising they have to take responsibility for their retirement and planning for it; this could be that initially they opt to do it themselves and then as assets grow they seek advice. But the point is that this has the danger of being the minority rather than the majority.  

Politicians seem out of touch, and don’t know how to tackle this. To be fair do any of us know how to tackle this? I do however think journalists could help, as could financial planners (for example we have just launched a financial education website, and others are doing similar exercises), the challenge is whether we are up to it.