The myths about the RDR continue
24 Jan
We are less than one year away from the implementation of the Retail Distribution Review and an organisation announced today the following results from a survey that they conducted at the end of 2011.
The results are in bold and my comments follow them.
1. Over 93% of IFA clients do not understand what the RDR is and the benefits it is supposed to bring them.
So what? Isn’t it about time that the intermediary world recognised that it is the role of the IFA to educate their clients about these changes?
Why do so many feel that it is someone else’s responsibility (the FSA) to do this? Is it simply laziness or do they lack the skill set and energy to do this? Are the authors really saying that IFAs are so poor at communication that they can only explain the RDR changes to 7% of their clients?
I doubt this very much and feel it is more likely that the IFAs responsible for these clients have simply abdicated responsibility for this educational process.
2. Only 20% know and understand that they will have to personally pay for IFA services with no commission option being available.
This kind of statement worries me greatly. It suggests, if you read between the lines, that commission is somehow a “no cost” option” to the consumer.
This has been the historical problem with commission (even post the disclosure regime introduced in 1995) not that it distorts or introduces product or provider bias (there is little evidence of that) but that it has been used to mis-lead consumers into believing that “someone else pays” (the product provider).
Clients always personally pay whether via commission, fees or adviser charging.
Secondly the myth is perpetuated that the abolition of commission means that the client has to pay fees (I accept the word isn’t used here, it is later on, but you can see the thrust of the statement). Rubbish!
Adviser charging is a method very like commission where the cost of advice is paid from the recommended financial product. The advantage is that it is an amount agreed between consumer and adviser and thus the consumer has the chance to determine whether they get value for money or not.
An IFA post RDR who wishes to continue to operate on a speculative basis where they only get paid if the consumer buys a product, is perfectly at liberty to do so.
3. Alarmingly, 85% of IFA clients do not understand the difference between the new interpretation of independent and non-independent advice
So explain it to them then! Again, why is the author so surprised about this and what are IFAs doing to explain the advantages and disadvantages to their clients?
If the IFA seriously wants to engage with their clients to explain this subject then there is plenty of source material available (including papers from the FSA website) if they are prepared to put some effort in and do so.
4. 61% of IFAs need help in educating clients about the impact and effects of RDR
At last here is the crux of the matter. It isn’t that clients don’t understand the RDR but that 61% of IFAs don’t understand the RDR.
There are massive amounts of help available, not least via BrilliantWithAdvice. Again we need to ask what are IFAs doing about getting the help that they need?
5. Not surprisingly 93% of IFA clients would prefer a commission choice remain available to allow the client to decide which remuneration model suits them best.
Of course we don’t know what they were asked. Were they asked “would you prefer to pay for advice by commission which doesn’t cost you anything?” or “would you prefer to pay for advice by a fee from your bank account (unknown quantity) or by a small amount deducted from any product you buy?”
Without knowing how the question was phrased how can we tell how the client determined his/her answer?
Again, note that adviser charging employs the same methodology of deducting the advice cost from the product as commission does
6. Amazingly only 1.1% if IFA clients see qualifications as being valued most. Face time and experience is what matters according to 90%.
And yet this “experience” has no definition on which we can all agree.
No one would argue with face time as a valuable and again doesn’t the client formulate their answer based on how the value of those qualifications is explained to them?
And why is it that relevant qualifications and relevant experience are perceived as mutually exclusive- why can’t the IFA client have access to both?
7. Only 18% of IFA clients see value in being better qualified
Shame really because if they used these better qualifications to promote their offering they would find like we have that consumers respond very positively to them. If on the other hand you are a product salesperson (albeit ethical and diligent in what you do) you may rightly consider that being better qualified is of little value to you.
8. 61% of IFAs see they will lose clients as a result of fees being the only way.
The RDR is not about “fees being the only way”. Please stop this myth is it any wonder that clients don’t understand what is going on.
If IFAs are approaching their clients (as we have witnessed) and telling them that from now on the FSA insists that the client pays a fee for advice then frankly they deserve to lose clients.
I agree with much of this Nick, but still concerned that many advisers struggle with issues such as independent vs restricted, and I don’t think the message will get out (which it must) to those who don’t currently have an active adviser without some sort of central push from the regulator, government or trade bodies. We need to get the message out beyond the reach of those already well served by advisers.
Phil
I agree it is about both the IFA community applying themselves to this communication problem and the Regulator/Government doing the same thing. However, the survey in question looked at existing IFA clients which made it all the more worrying!
Nick.
Unfortunately, having attended various seminars recently your comments don’t surprise me. I heard one IFA telling someone else in December that he still didn’t think RDR would go ahead next year!
The biggest problem, however, is the fact that many financial advisers have for years “suggested” that the advice is free. Now that they’re going to have to explicitly agree the costs up front, many are scared that existing clients will suddenly find out how much they’ve actually been paying over the years. Clients don’t understand commission, principally because our industry has never properly explained it to them.
Don’t suppose you’d care to name the organisation in question?
Thank you very much for your interest in our survey, Nick.
Our intention was to highlight that the industry clearly has a bit of work to do around RDR. However, I think it’s also important to view the rationale behind our survey as well as all the comments from the contributing IFAs. With so many respondents (740+), it is difficult to dismiss these results and as an industry we should continue to be collectively concerned.
As a neutral online community for smaller IFA firms, what we have tried to do is shine a light on the message around RDR as well as those that should be receiving it, the consumer. It seems to me that neither has been considered.
Here is a link to the full survey including the IFAs comments which should hopefully give a full picture. My personal feeling is that the debate if far from over.
http://v2.panaceaifa.com/img/20/documents/RDR%20SurveySummary%20with%20comments.pdf
Derek Bradley, CEO of PanaceaIFA
Having read the survey, I think it answers some of the questions Nick poses in his blog when he asks, How were the questions framed? The questions weren’t even directed at IFA clients, IFAs were asked what their clients thought, so reporting that “x% of IFA clients think…” is inaccurate; it should be, “x% of IFAs think their clients…”. I doubt very much if any IFA who needs help explaining RDR to their clients has even asked clients what they think about it, so how can they know?
Many IFA’s who responded to this survey did not recognised the hordes of disgruntled consumers that the FSA claims to represent in RDR.
Clearly, the move towards IFAs at the expense of tied agents, the low complaint level, and my own experience of happy clients is meaningless in light of the FSA’s research.
So before you critise this survey consider that the FSA have conducted little or no research and were critisised for this by the TSC. Earlier the FSA were quite happy to use only 20 interviews when looking at “Fees and Commission” in their CP121 study. More recently, when their research (Charles Rivers) didn’t support the FSA view on the future Brave New World it was disregarded.
This survey is an honest reflection on the real word other than seen through the Ivory Towers at Canary Wharf
Forget the rhetoric, is RDR a step forward or back? Will it instigate additional engagement or turn off potentialand/or existing clients.
Given that the majority of consumers currently opt for commission and given that the perception of the RDR is that fees must be discussed and agreed it is clear that even if we are able to educate all of our clients there will be a huge rump of consumers who are turned off.
These will wander into the banks and be scoppe dup by supposedly salaried advisers. Many will not wander anywhere and will add to the savings, pension and protection gaps.
The RDR has already caused a 20% loss of advisers since 2008 and another chunk will fall away in the next 12 months.
Regardless of fee and commission posturing surely any sane human being can see that the RDR repercussions are appalling and purposeful. It’s not as if they haven’t been told.
Derek
Thank you for your post. I guess my response was motivated primarily by the continued assertion that the RDR in abolishing commission reults in the consumer “having to pay a fee”. This is not correct. An IFA who decides to offer a speculative service where they only get paid if the client buys a financial product may continue to do so post RDR. But instead of commission it is called adviser charging. The benefit to both the client and the IFA is clear- it is an amount agreed between those two without interference by the product provider. Thus a consumer can continue to pay their advisory costs from the product.
My response was also motivated by the suggestion that the client does not already pay such costs through the commission mechanism- when clearly they do.
I also respond badly to the thought that somehow “experience” is better than “qualifications” Why consider them to be mutually exclusive? Why not have both.
But mostly I was prompted to write because I find it very strange that so many IFAs seem to want others to do the work for them. Sure the FSA and indeed Government has a role to play in promoting independent advice but you know what? I actually think that is the job of the IFA and sorry to say it but some don’t seem to be up to the job?
We have worked now with over 60 IFAs helping them get their RDR act together. Interestingly not one of them ses the RDR as a problem but because they are forward thinking they see it as an opportunity. What is it I wonder that makes them feel so positive when so many tkae the negative approach?
Thanks Nick
This has opened up an interesting debate. I am pleased that over 60 IFAs see it as an opportunity but out of our 740 respondents this is not always the case despite many being RDR ready.
Here is a good example from an RDR ready firm thus making the comments even more relevant and indeed timely- http://www.panaceaifa.com/main/st5689.htm
I think the issue of qualifications is an important one. Advisers should rightly feel proud of what they have achieved but although I am happy to be proved wrong, our respondents would suggest that to date their clients do not see value in qualifications and that is very sad.
The important thing is it is creating a debate around a subject not previously explored that should have been. We may not agree with all the views but it goes to show that there is a lot to do before the Fat Lady sings from all within the industry as well as the FSA.
I actually don’t this letter is all that relevant. Points 3a & b show clearly that this adviser thinks that the only thing he can charge for is selling a product. With respect, I don’t think this adviser is, in fact, RDR ready, if he can’t explain his proposition in such a way that his clients understand its value.
Simon
Thank you for your post. My criticism of the survey was not an attack on the output. But the continued promotion of the myth that;
a) the RDR requires consumers to pay fees- it does not, adviser charging is not the payment of fees, but it is transparent and as I repeat above an agreed amount between adviser and client. I can see no disadvantage to the consumer in such transparency but I can see how it forces IFAs to have to be able to prove their value and I don’t believe any of us sees that as harmful in any way;
b) to expect consumers to understand the value of qualifications without them being explained to them (by IFAs by the way and not by the FSA) is naive. To claim that experience somehow trumps qualifications is as daft as to suggest that qualifications trump experience. If I was a consumer I would demand both- I repeat they are not mutually exclusive.
I am afraid I have to disagree with you Simon, I live and breathe the real world of the IFA and I have to tell you that adviser charging really works well and in the interest of my clients and the extra qualifcations adds real value to the advice I provide to my clients.
Alan
Thank you for your post. RDR is a massive step forward but only as long as you embrace it and work on how it benefits your clients. If you keep telling clients that they have to pay fees (when they don’t) then yes, they will respond negatively.
We have come across stories of clients being told by their IFA “you have to pay me fees in the future because the FSA tells me that’s how I have to charge” Come on, the answer to that is always going to be 100% “no”
Our favourite one was the IFA telling his client that from now on each phone call would cost the client £135. As you can imagine they no longer have that client as a client!
This is definitely about proposition. If it is valuable and valued by the client they will pay for it- via fees or adviser charging either way. It also does not require the IFA to change their approach they can as I have stated above continue to work in a speculative manner and decide only to get paid if the client says “yes” to the financial product proposition, exactly as many do now via commission.
I am sane (although some members of my family may disagree!) I actually meet with more IFAs who are dealing positively with the RDR than IFAs who are likley not to make it.
We need I think to dig beneath the numbers that you quote as having left the sector or who are likely to leave. I suspect the reasons are more complex than the RDR changes.
There was, I think an American Officer on a D-Day beach who motivated his men stuck on said beach, by saying “There are only two types of men on this beach, dead ones and those who are going to die” a poor analogy but I believe there are two types of IFA on this RDR beach, those who are motivated, skilled and able to get off it and those who won’t make it.
The choice is up to them
Derek
Thank you for that. I have visted the link and have to say my experience of adviser charging and the response from clients more closely matches the experience described by Harry than the views of Douglas.
A first meeting at our expense and without obligation identifies the clients needs and wants (problems if you prefer)
An engagement letter explaining exactly what we are going to do for them and what we are going to charge follows that meeting. Some reject the offer of our services but that is fine because we have not provided the advice to them for free. And if they do reject the engagement terms that must be my fault, not theirs, for not articulating a valuable enough proposition to them.
The majority however say yes. This must mean we are marketing to the right type of client. That we have identified and can communicate their problems to them better than they can and that the evidence that we offer them of the quality of what we do and the potential solutions that we offer attracts them enough to want to pay for the service. Again as Harry says this does not have to result in a product being purchased (although often it does)
I agree with you though that there is no one way to do this but I have to say practical experience over the last seven years informs us that adviser charging works and that a proposition which includes reference to higher qualifications adds real value to real people
Nick – I agree with much of what you say. In particular the opportunity that RDR represents for progressive firms who embrace the opportunites, which are many.
After all, who wouldn’t want their clients to view them as a professional rather than a sales person? Who wouldn’t want their adviser to not have any whiff of product influence or commission bias when formulating advice. What adviser wouldn’t want a profitable business that doesn’t rely on cross subsidy to exist. I could go on!
In my very humble opinion RDR is not a threat to our industry but an opportunity to present ourselves to the public as professional advisers who can add a great deal of value to their lives. It is not perfect… nothing that the FSA comes up with ever will be, but whilst the nay sayers heads are still stuck in the sand, those of us that can see the opportunity are quietly building profitable, client focused practices.
David
Thank you for your post.
I know I “bang on” about it all the time but it is as you say about the ability of the IFA to promote their proposition. Put bluntly (and I do not mean to offend anyone) If the proposition doesn’t sound valuable then of course the client is going to say “no”
I honestly believe that if the proposition is “I choose the best product/funds from the whole of market” (or something similar) then most clients will reject the proposition.
I think the real challenge over the next 11 months is less about qualifications because most IFAs are on their way to getting those, and much more about proposition design and communication
James
Thank you for your post. I agree it is by no means perfect but nothing ever is. I reckon it is mostly an attitude thing. A lot of people are afraid of change (understandably so in some cases) but actually “change is the nickname used by opportunity” and evolution is an important part of being in business