Restricted or independent that is the question?

I recently followed a really interesting debate around whether a financial adviser should be restricted, independent or chartered. There was also a debate around what service is and to some this centered on products.

This debate sprung out of a recent survey which asked people questions around restricted and independent advice. The problem in my mind is that for many it is not about whether someone is independent or restricted that matters it is all about the service and whether you have faith or trust in them.

Let me give you an example, I have used this many times before. I want a car; do I go to the first garage on the high street and say I want a car? The answer for many is no, what are the stages you go through. You first of all identify what you want the car for, and what money you have to spend.

So for example if you just want a car to run around town in then you are going to look for something small. If you have enough money you might want something new, or you might want something on lease or with a loan. Once you have done your research you will then go to a garage, ultimately whether the garage is restricted to selling just a certain type of car or the whole of the market doesn’t matter it is whether it can deliver on your requirements that is important.

The end decision is likely to come down to what you feel about the garage and the after-sales service.

So what does all of this mean when we look at financial advisers? I have puzzled a lot about whether as a firm we should be restricted or independent. To some extent as a business we are restricted because we have segmented our clients; our service is very much about identifying goals and delivering on those goals. We do use an administration platform and we do create portfolios. We will off course go away from this if we need to bespoke but just because we go down the restricted route doesn’t mean we can’t do this.

Of course we could take the independent tag and speaking to the FSA we can exclude products from our offering if we want and we don’t have to tell the clients this we just have to make sure we record this. Obviously just because we have excluded products if a particular client needs one of the excluded products then we could use it.

Ummmmm, now you see the problem restricted and independent are really the same thing. I read something recently that actually said this will only confuse and really we should ditch this terminology and stick to financial planners. Ultimately we are or should be financial planners. To say service is about products is wrong. Service is about what you do for the client and what the client is paying you for. I have been on a few financial planner websites and cannot find what their service is, I have been on others where the service and philosophy of the financial planner is very clear.

If I go back to the car analogy and apply that to advisers, if I was looking for advice then I am more likely to approach someone whose service and philosophy is clear for all to read.

To be restricted or independent that is the question? The answer well I don’t think it matters, the real answer is what is your service proposition and is that clear to your clients.

Retail Distribution Review (RDR)

From 1 January 2013 we face a generational change in financial services. Personally I think a lot of this is for the good of the end client.

Why do I think it is good for advised clients?

1. It will force financial planners to have a clear service proposition for their clients 
2.  It will force financial planners to set a fair charge and link that with the service proposition
3. It will force financial planners to be fully transparent with charges and fees

However what has been forgotten is that many financial planners are already doing this. But the problems which have come from this is that many people are being priced out of the advised market i.e. because of the amount they have they can’t find advice.

This means they have to do it themselves and this market is in a very complex stage adjusting to new pricing models. 

If I was to identify problems with the FSAs changes it would be the time they have taken to make some of the decisions. One of these is around rebates. To the average person this means nothing. If you buy a pension through say Hargreaves and invest in a fund you may pay 1.3% p.a. and assume this is free. In reality Hargreaves are receiving a payment from the fund house of anything from 0.5% to perhaps as high as 1%.

There is a concern that the higher the rebate they get the more influenced they are to promote the fund. Whether they are or they are not is one for debate but whilst you have this potential for bias there is a danger. So to remove this bias all rebates are going to be banned.

Now you would assume this would come in from 1 January 2013 to ensure that both advised and non-advised were on a level playing field but no potentially it is going to be 1 January 2014 and why? The reason is that the FSA have only just made up their minds but even then haven’t agreed the final aspects of it.

The paper is worth reading because it is very important to all - http://www.fsa.gov.uk/library/policy/cp/2012/12-12.shtml

 

This is not about one provider outsmarting another it is making sure everyone has a clear, fair structure to work from and I would strongly recommend you respond to this paper. 

Below is the response I sent to the FSA:

Response to CP12/12 – Payments to platform service providers and cash rebates from providers to consumers

Q1:  Do you agree with our proposal to require a platform service to be paid for by a platform charge disclosed to and agreed by the client

Firstly the question is more about whether all fees both advised and non-advised should be disclosed and the answer to this is yes. What we have to be careful is how we see the platform. The platform is purely a technology tool to deliver solutions or goals. It will provide different tax efficient vehicles but it is not a product.

For an advised proposition the question is whether the service offered by the financial planner offers value for money. It is not about whether a typical platform offers value for money and this is an important distinction.

If a financial planners typical package including the “platform”, investments and advice costs 2% p.a. a year and delivers on the client’s goals then as long as the client is fully aware of what the financial planners charge is then they can judge whether the proposition is providing value.

The clients are unlikely to mind about the cost of the platform because they are not looking at this level of detail and that is why they have a financial planner. It is however important that the platform charge is a single fee and not different per product (i.e. some adviser led platforms charge say 0.4% for ISA products and 0.6% for SIPP and they should charge a flat fee of say 0.4%. Likewise you see different charging structures for non-advised business).

If an adviser was influenced by rebates on “platforms” either by the provider or investment house then ultimately that would reflect in the service they provide.

For non-advised business you have a different picture. Many non-advised platforms are seen as “free” and are advertised as such. This makes it very difficult to compare whether paying an additional premium for financial advice is worth the cost.

It is also clear that a small number of high profile “free” execution only services receive large rebates up to 1% to ensure funds are shown on their preferred list and promoted within their publications. Although this is denied by these providers it is widely acknowledged that this is the case within the fund distribution world. I have one example where a fund management house admitted they were a promoting a new fund via one service because they were guaranteed £80 million plus in new money to cede the launch of the fund.

It is therefore important that this distortion is removed from non-advised and advised businesses and all charges are fully disclosed. The problem which isn’t acknowledged within the paper is the potential complex structures already appearing in the market and this makes it harder for people to compare.

So on one hand the requirement to disclose the platform fee and remove any rebates is right but the danger on the flip-side is a complex structure of charges which make it harder to uncover which non-advised propositions offer the best value for money.

Q2: Do you agree with our proposal that cash rebates to consumers for non-advised business should be banned as well as those for advised business?

Looking at the advised side I believe the assumption is wrong. Clients see the cash account as source of many things. Ultimately it comes back to understanding that a platform is not a product but a solution. The cash account is used as a holding place for investments, it can be used to distribute income and it can be used for rebates to be paid into. It is also ultimately used to pay fees, if these are paid from the investments, and it also covers any charges the solution provider imposes.

In many cases the financial planner will always need to ensure that there is sufficient cash within the cash account to cover these various scenarios. The rebates do not always cover all of this and therefore some investments will have to be sold down to cover shortfalls.

All of this comes back to the service proposition, if the client understands the service and is fully engaged with the process they are not worried with this level of detail. What the proposal is trying to do is stamp out the “rogue” traders but many clients already see through this where clients are on platforms. The problems comes were clients have old life policies and SIPPs where this is not so clear.

To bring in a rule means you have to bring it across to both sides of the business so both advised and non-advised. The problem you have with non-advised is who is going to control the cash account to cover the platform charge? I have seen recent examples where a provider has said the £20 quarterly fee will come from non ISA cash account, then the ISA account and if that fails the clients debit card.

Having cash rebates for both advised and non-advised does provide a feed of money which can be used to pay the charges. Bringing a ban brings in another layer of complexity which will make it difficult but manageable for the advised side but potentially complex on the non-advised side.

In summary I agree that if rebates are to be banned they should be banned for both advised and non-advised business. However, I believe the assumption is wrong and actually it helps the client covers fees. The fees should be fully disclosed and if part of those can be paid for via cash rebates then that would be better. The problem you will always have is that some platforms may be able to demand greater rebates for clients than others but ultimately certainly for the direct side this has to be positive for the consumer when comparing different charges.

Do you have any comments to make on the proposed date for implementation of 31 December 2013?

Personally I am aware that all platforms and fund supermarkets have in place different pricing models to cope with these changes whichever way they went. The problem is that a decision which could have been made two years ago has been dragged on.

There should be no delay and the changes should come in from 31 December 2012. There is evidence that non-advised platforms are already implementing changes so others should be made to do the same.

To delay it means that where advised models have to fully disclose their charges non-advised don’t and you start to create confusion in the market. On the non-advised side where firms implement changes early there is a danger that people switch to a free service only to face charges 18 months down the road. There is already evidence that certain high profile non-advised platforms have been targeting clients who have investments with platforms who have adopted a transparent structure.

So a delay would not send out a good signal to the marketplace and the changes should be adopted earlier to avoid client confusion.

Q4: Do you have any comments on the possible read-across of platform rules on payments for services to non-platform markets?

There are two points here. It appears that many non-advised and advised practitioners believe that as long as the client remains in a fund then the rebate for that share class remains as long as they are in that fund. For advised this will show through because of the value proposition but for non-advised this creates a problem. Potentially it will make those that promote funds which pay the highest rebate continue to promote those funds to avoid clients switching out and therefore losing that valuable payment.

It is therefore important that if cash rebates are banned then they should be banned for existing clients as well. So effectively a new share class is created and all clients are automatically switched into that share class. This provides a totally level playing field between the advised and non-advised market. The advised market will have a charge for the platform and their service as well as the investments; the non-advised will have a similar charging structure.

The second point is whether you should only apply the ban on rebates to platforms and not to non-platforms. The FSA are looking to create a clear and transparent structure. Whilst there is an imbalance between different different solutions then you have a problem. Potentially for non-advised business they could set up a SIPP outside of the platform and take rebates, they could potentially argue that the SIPP is not part of the platform. This then makes it very hard for the end customer to work out what costs they are paying and how they compare this against other providers.

In summary a ban on rebates should go across platforms and non-platforms and should in place from the end of December 2012. In addition to avoid potential mispricing or double pricing it should apply across all product solutions including SIPPs and life company products. This will avoid launching a new transparent system which on day one has inconsistency and confusion.

Q5: Do you have any comments on the draft rules in Appendix 1?

The first comment is around adviser remuneration not being obscured. The Retail Distribution Review ensures that the adviser charge is fully disclosed. Stating that the cash rebates will obscure this is incorrect thinking.

It goes back to the point that the rebates may pay some of the charges but they also may be used towards income, they may be used to pay the platform fee, they may also be used to pay the platform fee. Equally the client could have income payments from income units coming into the cash account. These could be used to pay fees as well. So the danger is about creating confusion.

If as is likely you have a new share class switching or re-registration of assets becomes more difficult because you have an additional layer of fund classes.

The concern over distribution influence is a big concern but I believe with RDR this removes that for financial planners because of the requirement to fully disclose charges. For non-advised platforms this is a big concern but unless the rebate ban is placed on existing business and across all product types you will continue to have distribution influence because it is in the best interest of all parties (with the exception of the client) to keep the client in a particular share class to draw out the maximum amount of profit.

Going forward this potentially goes for new business on platforms but you could continue to see this where providers remove their SIPP from the platform and continue to get rebates and distributer influence via this route.

Effectively what this document doesn’t do is close all the potential means by which larger providers can continue to command large fees at the detriment of the client.

Q6: Do you have any comments on the cost benefit analysis?

From an adviser side I have always believed transparency is key but assuming that rebates somehow mask that is poor thinking. If the financial planner fully discloses his fees which he should do now, but will have to from 1 January, whether a rebate is paid or not makes no difference.

All that happens is that you add an additional layer of complexity where cash has to be found. The client will judge the financial planner of the service proposition and not whether they have cash rebates or not.

For non-advised you are creating a very complex market. In reviewing this market recently I have seen evidence of many bringing in quarterly fees which can be complex. So for example one charges £20 a quarter but has a family link so it covers all family linked plans. Others charge £11.95 but have no family link. Some allow trading charges to be taken from the quarterly charge so effectively you have a bank. All of these pay the cash rebates back to the clients.

The point is the cash rebate makes no difference to some companies but what you have created is complex structures. If you don’t ban rebates on existing funds then how are the propositions going to be priced and how is the client going to be able to work this out. The danger is that non-advised platforms with a lot of influence who are already encouraging clients into funds will encourage them to stay in these funds to maximise profit

The other problem which I have identified is that where a quarterly fee has come into play it has priced out the lower value savings i.e. someone saving £50 a month. These are just the people we want to encourage to save. These people are already priced out of the advised market so how do they save?

From an advised side the assumption is that advisers will shop around to get the best price on fund prices and platform prices to show their service to clients. This is very product focused. A financial planner uses a platform as tool or solution to drive the goals. It is not that the charges can be high but if we focus on that then we are looking at the wrong driver for value.

There is evidence that some platforms charge one fee for some products on their platforms and one fee for another product. If rebates are to be banned then platforms should have a single fee irrespective of product type. This is hinted at by the paper but should be pushed through. So there is evidence of at least one advised platform charging 0.4% for ISA/ Non-ISA products and 0.6% for SIPP. If we take away the idea of a product and focus on a technology driven solution then the charge should be a flat fee of say 0.4% or 0.5%.

This is important because financial planners are required to have a single flat fee for their service and equally technology driven solutions should do the same. This would mean in explaining the charges it would be easier and simpler to do, as it stands it becomes more complex.

On the non-advised side Deloitte do not see any negative effects of bans on competition. On the non-advised side clearly the new means of developing a solution will drive down potential margins and will discourage people coming into the market. It states that it is unlikely to have complex structures but the structures that are there are complex. There are charges to transfer money away; there are penalties if the quarterly fees aren’t paid. The banning of rebates could make the structures very complex especially if the rebate ban is not implemented on existing business and across SIPPs and life products.

In summary on the cost benefit analysis there are some very dangerous assumptions. For non-advised business unless it is brought in from 31 December 2012 and across existing plans as well as new business you have the potential to create very complex structures. Even by bringing in the ban you are creating complex structures but you cannot ban it on advised and not ban on non-advised where the bias is greater. And finally you must ensure that platforms implement a single fee for their services and not product related fees because this adds in complexity.