While we’ve all been busy focusing on the Select Committee’s having a go at Rupert Murdoch and the Met over the last week, we’ve been missing a trick.
Another select committee has also been busy at work. This one has been listening to evidence on the possible impact of the introduction of the Retail Distribution Review (RDR). The RDR, which is supposed to come into force at the end of next year, recognises that our current financial advice system is a mess.
So it bans the payment of commission by product providers to financial advisers, and it demands that advisers who wish to call themselves independent increase their education levels. Right now, they have to take a qualification that is roughly equivalent to an A-level. This is to be upped to one more like the first year of a degree.
You might think that isn’t that big a deal. A large number of financial advisers (and the product providers who pay them) would disagree. They don’t much fancy the exams and they can’t see how they can make a business out of charging clients fees directly, instead of taking commissions from the providers out of their clients’ money instead.
They also talk very loudly. So much so that they appear to have succeeded in bringing the Treasury Select Committee around to their way of thinking. The Committee put out a report at the weekend suggesting that the RDR be delayed by another year.
I consider this an outrage. Why? Because, while there are huge numbers of great independent financial advisers (IFAs) around, commission payments make the system too open to corruption, intentional or not.
Imagine that you bought a house from an estate agent. He charges you a few percent of the value of the house up front. But that’s not all. He then charges you another 0.5% of the value of the house for every year you live in it. If you ask him why, he tells you that he is providing you with ongoing advice on your home ownership. You wouldn’t be too thrilled.
However, you’d be even less thrilled if you later found that he was paid a backhander by the seller to persuade you to buy the house in the first place. And that there was actually another one a few doors down that you might have liked better – and which might even have come without the ongoing advice fee – but he hadn’t shown it to you. That’s what the estate agency business might look like if it was run like parts of the financial advice business.
Not convinced? Consider the report just out from Consumer Focus on pensions advice in the UK. The watchdog suggests that advisers are being tempted by high commissions to get investors to move in and out of pension products regardless of whether they come with higher costs or higher risks (this is known as churning).
There has also been a rising trend in advisers moving investors into pension products that carry trail commission (that 0.5% every year for “ongoing advice”). Trail commission paid to advisers is up 10% in the last two years, even though 53% of clients interviewed say that they have no continuing contact with the adviser who sold them their pension in the first place.
This matters because it isn’t particularly transparent: advisers are of course supposed to explain it, but it doesn’t take much to become a master of the small print when it comes to finance. And it matters because it costs investors a fortune: Consumer Focus and the Financial Services Authority (FSA) estimate that fees and charges reduce the value of the average pension by 30% over its lifetime. That’s easily the difference between a great retirement and a not so great one.
Basically, allowing this system to continue for another year is, as Matthew Vincent puts it in the FT, akin to the Home Affairs Committee deciding that it is OK “for policemen to receive ‘media hospitality’ for another year.” That’s not going to happen and this shouldn’t either. We need to get on with reforming the industry so that the good advisers – the educated honest ones which surely form the majority – can get on with giving proper advice and restoring the reputation and integrity of their industry. Any advisers who can’t do that might as well retire in 2012 as 2013.