Retail Distribution Review (DDR)

caveat_emptor

Report on Trustnet says "that between 30% and 50% of IFAs will leave the industry because of legislation due on 1 January 2013.
New regs will require advisers to hold qualifications or prove that they adhere to professional standards of education. Other reasons given are the move from commission-based to fee-based charging and (this is a good one) because of client expectation driven by media expectation and by competitive advisers who are more dynamic"
As a punter I welcome the legislation. Are there really IFAs out there who are not appropriately qualified? (rhetorical).
Too much smoke and mirrors about commission-based charging so move to fee-based is IMO a good thing.
As regards expectations being driven by the media, I must have missed that one but I suspect it is more to do with increased competition upping the ante.

dunstonh

Report on Trustnet says "that between 30% and 50% of IFAs will leave the industry because of legislation due on 1 January 2013.

30% is the most common expectation covering the period from announcement to commencement. It is unlikely you will see 30% leave in the next 6 months.

Client expectation driven by media expectation is rubbish. RDR has effectively been coming over the last 20 years and a lot of the current changes were documented as proposals over a decade ago.

Investment products started going explicitly charged nearly a decade ago and nowadays virtually all are explicitly charged. For most advisers, it wont actually make that much difference in most areas of business as they already work that way and have for many years. Ironically, one of the few products left nowadays that is still funded commission based is the stakeholder pension. It is ironic that the stakeholder pension is not compliant with RDR and cant be due to its design.

rpc

dunstonh wrote: »

Ironically, one of the few products left nowadays that is still funded commission based is the stakeholder pension. It is ironic that the stakeholder pension is not compliant with RDR and cant be due to its design.

I had not realised this. Is there any indication of what changes will be made to stakeholder pensions in preparation for RDR?

gadgetmind

rpc wrote: »

I had not realised this. Is there any indication of what changes will be made to stakeholder pensions in preparation for RDR?

While the stakeholder was an important evolutionary step, it's now one of those "living fossil" things. Oh, and to answer your question, I don't know!

pqrdef

caveat_emptor wrote: »

Too much smoke and mirrors about commission-based charging so move to fee-based is IMO a good thing.

Some parts of the market are much more price-sensitive than others. Hiding the margins allows businesses to respond appropriately, making their money where they can.

This is all a bit like Tesco displaying the wholesale prices of goods and adding a fixed service charge at the till. As a way to do retail business, it's nonsense.

grey_gym_sock

comparing financial services to groceries is like comparing software to cars ...

"respond appropriately" has often meant steering customers into the investment which pays the highest commission, while giving them the impression that they've received proper advice.

dunstonh

As gadgetmind says,the stakeholder pension has served its purpose. It brought charges down. However, it was designed with commission being factored into the annual charge and cannot by design have an explicit charge taken against it.

Since around 2005, stakeholder pensions have become largely obsolete for most people as personal pensions started to move to explicit charging. This allowed the annual charge to be virtually clean of cost of advice/retail and instead have an initial charge to cover that. Typically, the breakeven point was around 5-15 years. So, as long as you had at least that period until retirement, a personal pension would be cheaper than stakeholder on a like for like basis.

Stakeholder will continue to exist for a bit longer but it is already a minority product. The direct providers will still retail it at 1% or thereabouts. Advisers will use personal pensions as they are cheaper for most people. Experienced investors wouldn't go near a stakeholder anyway.

The FSA has said it intends to keep rule RU64. So, even if stakeholder pensions disappeared, the benchmark requirement will continue to exist that any alternative to stakeholder has to be justified on advice cases (and lower cost than stakeholder is an easy justification).

Some parts of the market are much more price-sensitive than others. Hiding the margins allows businesses to respond appropriately, making their money where they can.

This is all a bit like Tesco displaying the wholesale prices of goods and adding a fixed service charge at the till. As a way to do retail business, it's nonsense.

One problem with the RDR is that the "retail" side of things seems to have been forgotten. IFAs are not just advisers. They are retailers. No other retail business has to break down the costs in the same way.

"respond appropriately" has often meant steering customers into the investment which pays the highest commission, while giving them the impression that they've received proper advice.

There has never been any evidence supplied to suggest this is a widespread problem. Small pockets have appeared from time to time but it is one more of perception than reality for the majority. Personally, I think customer agreed remuneration is perfect. It removes the perception of bias. It prevents greedy amounts and everything is nice and clear. However, it does mean that the bottom end of the market will lose out. For example, I will charge a £10,000 investment £500. That is 5% equivalent. Commission is typically around 3% and the average commission take was 1.8%. So, on small cases, commission was cheaper initially.

Another case I have got this week is where a S266 retirement annuity contract with guaranteed annuity rates is due. I agreed a fee right at the start. The RAC cannot be beaten on the open market so we are going with that. There is a commission that is actually within a few pounds of the fee. So, it works out nicely. However, if this was post RDR, that commission would not be paid. Plus, the guaranteed annuity rate would not be increased. So, the fee would be paid from the tax free cash payment. This makes the consumer worse off and the insurance company better off as they dont have to pay something that was priced into the original contract.

rpc

gadgetmind wrote: »

While the stakeholder was an important evolutionary step, it's now one of those "living fossil" things. Oh, and to answer your question, I don't know!

The thing is, it is the only vehicle (aside from a SIPP) that I have found that will allow low contributions. I intend to start saving into pensions for my children at the end of this year (the plan is one pension and two IT plans each) and I had identified stakeholder pensions as the best for them, at least early on. Personal pensions have too high minimum contributions and SIPPs will be more expensive for the first 5-10 years while contributions build up.

For most people, I agree that stakeholders have past their use-by date but there is still a small market for low-cost, low-contribution pensions. I'm open to other suggestions if I have missed an alternative, but I should save that for a thread nearer the time

Rollinghome

pqrdef wrote: »

This is all a bit like Tesco displaying the wholesale prices of goods and adding a fixed service charge at the till. As a way to do retail business, it's nonsense.

Are you in the trade? While you still may not see any problem with the current situation, others may see it a little differently.

Tesco are retailers and they make no pretence otherwise.

Unfortunately you are quite right to suggest that too many Financial Advisers have just been selling products as Tesco sell soap powder. But most have portrayed themselves not as salesmen but as ‘Advisers’ or even Independent Advisers, and it’s that sugging that’s been the problem.

People go to Financial Advisers, not just to be sold financial products, but for advice. Too many customers have not realised the costs or that even that the adviser describing himself as "independent" is in fact being paid by the product provider to sell their products and will pay most generously for selling their most profitable products.

After RDR, Independent Financial Advisers will be considerably more independent of the product providers than in the past and with any luck financial advise will be less about selling like Tesco and more about genuine advice.

gadgetmind

My daughter has a stakeholder for those very reasons.

dunstonh

For most people, I agree that stakeholders have past their use-by date but there is still a small market for low-cost, low-contribution pensions. I'm open to other suggestions if I have missed an alternative, but I should save that for a thread nearer the time

And that is why they will continue to exist. There is market for them and the small contributions can still be cross subsidised by the larger ones on direct retail market.