The Retail Distribution Review (RDR) may lead to higher costs for consumers seeking financial advice and adviser charging structures post-RDR will still involve deductions from the customer's premium being passed back to IFA, according to our new research. The research indicates that without regulatory vigilance and genuine customer engagement, the current charge for advice through commission payments may simply remain under a different guise.
BDO conducted a survey of more than 280 IFAs, polling their views on RDR. The findings suggest that the major – and costly – changes to UK financial services regulation associated with RDR may change very little in terms of direct benefits to consumers either through lower adviser charges or more transparent charging structures.
In total, 90% of respondents said that they expected IFA remuneration to be as it currently stands or higher following RDR. Pre RDR, on a client investment of £50,000, the average initial commission charged by respondents was 2.9%, with an average trail commission of 0.6% per annum.
Post RDR, the average level of adviser remuneration on a £50,000 investment is expected to be an initial adviser charge of 2.8% of the investment amount plus an ongoing adviser charge of 0.8% per annum of the value of the investment as it changes over time (eg a 0.8% per annum charge on £55,000, if the initial investment accumulates in value by £5,000). In short, whilst the initial charge falls slightly (0.1%), the ongoing charge has risen by a greater amount (0.2%), meaning anticipated higher remuneration for the adviser and greater cost to the consumer.
In Total, 90 Per Cent Of Respondents Said That They Expected IFA Remuneration To Be As It Currently Stands Or Higher Following RDR.
Payment approach
Moreover, whilst RDR will signal the end of commission payments, evidence strongly suggests that these will be replaced by a structure which remains quite similar. 70% of IFAs, in considering how they might receive their initial adviser charge, said that the client would make a single payment to the provider with the provider then paying the adviser.
There is consensus amongst IFAs that the most prominent form of remuneration in a post-RDR world will simply be charges deducted from the customers' premium by the product provider and passed back to the IFA – just the same way as commission works now. Unless customers take a much greater interest in information shown to them than they do at present, there is a concern that – for all the cost to the industry – RDR will not make adviser remuneration any more transparent. What's more, it is clear that IFAs believe that their income will rise. Whilst RDR will certainly lead to a 'professionalisation' of the advice industry, meaning better quality advice, a culling of under-qualified IFAs and an overall higher level of service, it is clear that it will place an extra onus on firms and the regulator to provide clarity to consumers over charging structures.
Cost of advice
For those IFAs who intend to adopt an adviser charging approach based on hourly rates, the responses showed an average charge of £160 per hour.
Many industry experts have voiced fears of an 'advice gap' growing, where pricing would prohibit all but the most affluent consumers from seeking financial advice. The adviser charging levels anticipated by IFAs would seem to lend weight to these concerns. The fees advisers want to charge for advice seem significantly higher than what we believe consumers are willing to pay. Of course, advisers may simply be over-optimistic on the fees they will be able to charge and transparency and competition will force these down. The RDR is a major shake-up of the industry and still has the scope to improve the quality and value-for-money of advice. But its effect on the end consumer may be muted unless the regulator takes a very hands-on role in the monitoring of adviser charging structures post-RDR and in making sure that advisers and providers make very clear to consumers how much they are paying, to whom and in return for what.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
