Retail Distribution Review (DDR)

pqrdef

grey_gym_sock wrote: »

"respond appropriately" has often meant steering customers into the investment which pays the highest commission

Same as baked beans then. Manufacturers have to compete to get their products noticed. High margins encourage retailers to promote products, while low margins encourage retailers not to waste the shelf space.

There are still going to be marketing costs, and the customer is still going to end up paying them.

We might hope there would be fewer bad products sold on the back of high commissions, but I doubt it. The finance industry isn't going to turn saintly overnight, and we may assume it's already working on new ideas to part people from as much as possible of their money.

gadgetmind

pqrdef wrote: »

The finance industry isn't going to turn saintly overnight

No, but it's going to have to shrink as the supply of easy money slowly dries up. One would hope that what remains will be the good bits, but that's not how it usually works!

grey_gym_sock

dunstonh wrote: »

There has never been any evidence supplied to suggest this is a widespread problem.

well, pushing customers into the very highest commission paying option may be rarer; totally ignoring options that pay no commission is more common.

and i'm not only thinking of IFAs. a lot of ppl who've talked to a salesperson in a bank end up thinking they've had proper advice. it's also easy to take something like HL's marketing bumpf too seriously (despite the prominent disclaimers that it's not advice).

Pachira

Rollinghome wrote: »

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.

???

I'm confused. It has been a requirement for IFAs to fully disclose any commissions they earn for many many years now.

grey_gym_sock

pqrdef wrote: »

Same as baked beans then.

it's much easier to understand whether you've got a good deal with baked beans. if you didn't, you can buy a different brand, or go to a different shop, next week.

by the time you know your pension scheme was rubbish, it may be too late to get another. you may not even know then: what would a reasonable result have been for your contributions?

transparent pricing won't make making financial decisions as easy as buying baked beans - it just is harder. but it could help. costs are a very important factor. if ppl become more aware of them, costs could fall.

Rollinghome

Pachira wrote: »

???

I'm confused. It has been a requirement for IFAs to fully disclose any commissions they earn for many many years now.

It has, and to give the effect of charges, but that hasn't stopped some IFAs "forgetting" to enclose the documents that set out the charges and commission as happened to a friend/relative of mine recently.

Even when the full documentation is provided it's doubtful whether most clients will read it all or understand it if they do. When my relative eventually got all the paperwork (after I prompted him to ask for it) there was around 150 pages of difficult reading and even then didn't include any of the specific terms or prospectus for the individual funds which would have doubled the amount to read. It's those people who need advice that find understanding such documents most difficult.

And IFAs are not required to tell the client of lower charging products that pay them less generous commission and in my experience deliberately create the impression that they all pay the same.

pqrdef

Rollinghome wrote: »

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.

But when it comes to fund-picking, there's no guarantee that a professional advisor will get better end results than a monkey with a pin anyway.

Meanwhile, there will still be marketing costs. Fund houses need to chase volume, or their products will wither on the vine.

There's a synergy between products of all kinds and their marketing channels. Many good products have failed because they didn't get into the market. The existence and success of UTs and OEICs wasn't pre-ordained, it was very much linked to finding effective marketing routes.

Clean funds sound very nice - but I can't see why anybody would start one. With no backhanders to the trade, how do you build enough volume to cover the overheads?

If the OEIC goes the way of the with-profits policy, what's going to replace it? Is the future just a sea of synthetic tracker ETFs?

dunstonh

Clean funds sound very nice - but I can't see why anybody would start one. With no backhanders to the trade, how do you build enough volume to cover the overheads?

I try and use clean funds whenever I can. Backhanders are not a problem (in principle) as the annual charge of the fund is reduced but the client pays an explicit charge instead. If you take a 1.5% fund on a bundled platform, then it will still come out around that on unbundled (more for smaller amounts, less for larger). you will just be paying it in three segments knowing who gets what instead of a bottom line not knowing who gets what.

Possibly the biggest winners are the fund houses. Quick history lesson.... When platforms first started, the fund houses saw it as incremental business to their existing sales. So, the platforms were able to get a large cut of the AMC. The fund houses didnt see the platforms taking over. However, they did and this left the fund houses with much lower margins than previously. Some, started to put their charges up to compensate. Others absorbed it. Now, with clean classes, the fund house is able to take a greater share of the fund charge. So, they will be more than happy to continue marketing and possibly to a greater extent than previously. The platforms on the other hand stand to be the biggest losers as they will get less.

If the OEIC goes the way of the with-profits policy, what's going to replace it? Is the future just a sea of synthetic tracker ETFs?

OEICs are going nowhere. Clean managed funds are coming in at 0.7-1.1% TER. That is comparable with equivalent ITs. Trackers will continue unchanged other than the fact that platforms that offered them as loss leaders being cross subsidised by managed funds wont be able to do that any more. We have seen a few examples of a move to explicit charging recently to counter that. Expect more and expect increases in current charges for those offering them too cheap. My prediction, which could end up being wrong, is that the main passive fund providers will either get into bed with a platform and offer their funds through that platform at no extra cost or they will run their own distribution like they did in the old days or they will just retail them as they do now and you will have to pay the platform charge.

OEICs have a lot going for them. Single pricing, no varying NAV to be concerned with, no gearing, data levels published to a high quality etc. Some of those things may actually be something that an investor prefers to have on an investment and they can use the IT. However, for the mainstream, simplicity and clarity rules and the OEIC is perfect for that.

pqrdef

dunstonh wrote: »

However, for the mainstream, simplicity and clarity rules and the OEIC is perfect for that.

That won't help it if nobody's making money out of it. There are far too many funds, and if they get into a direct price war on naked management charges, margins will evaporate.

Rollinghome

pqrdef wrote: »

But when it comes to fund-picking, there's no guarantee that a professional advisor will get better end results than a monkey with a pin anyway.

Wouldn’t completely disagree with that though fund-picking should only be a small part of the process. Anyone reasonably sensible should be able to put together a decent portfolio of funds - although I’ve seen some pretty bizarre DIY fund selection by some on this board.

That’s not to say that some IFAs can’t make some naff choices as shown by the oddball collection that were suggested to the mentioned friend. Not only didn’t the IFA take into account the fairly substantial investment he had in ITs and direct equity investments but they didn’t even bother to ask. They just used their stock list and the result was a dog’s dinner. They also wanted to sell him insurance bonds that they misrepresented and were totally unsuited to his needs. For that “advice” they wanted to charge him over £20,000 initial plus a huge ongoing annual fee.

The answer I suppose is to use a “good” IFA rather than one of the many dodgy ex-salesmen types. The difficulty being that it’s probably as hard for an investor to identify a good adviser as it would be to choose his own investments in the first place. I don’t doubt that decent IFAs do exist though there’s certainly no one around here that I’d recommend.

pqrdef wrote: »

Clean funds sound very nice - but I can't see why anybody would start one. With no backhanders to the trade, how do you build enough volume to cover the overheads?

The idea is that the playing field should be level so that advisers will recommend funds on merit rather than the level of commission earned. So, with luck, no more Arch Cru scandals. ITs are effectively clean funds and aren’t allowed to advertise (though some get round that by advertising their ISAs etc.) Nonetheless, they’re bought by savvy investors on perceived performance alone rather than unit trusts and insurance bonds despite the advertising and commission payments those offer to advisers.

Already we’re seeing IFAs who would have done whatever it took to scare clients off tracker funds now offering them. There's been a big rise in sales. We could also see many recommending ITs provided they learn to understand them. All good for competition and downward pressure on charges.

Would be daft to expect too much of RDR and there’s lots of holes but ending the position where an “adviser” was really just acting as a self-employed salesman for the insurance and the fund houses will be a good first step. Obviously advisers will still want to maximise their fees but will increasingly need to do that based on the quality of their advice. I hope.