Many firms are still struggling with compliance as some face loss of cashflow and difficulties with the huge variety of adviser charging systems providers have set up. David Rouse (pictured) and Andrew Peters voice their concerns among others.
The retail distribution review (RDR) may be a positive step for the new model adviser movement, but many regulation details were only ironed out at the last moment. Now the deadline has passed, many advisory firms are still struggling with the finer points of compliance and how it affects their business.
Among the most pressing problems is the loss of cashflow, as products on which advisers may still have been taking initial commission turn it off or offer adviser charging facilitation (ACF). Even some largely fee-based firms are anticipating cashflow problems as commission on products, such as employee benefits and structured products, switches off.
Adviser charging difficulties
The move to ACF is proving to be the most difficult area for many firms because, although it is largely an administrative problem, if they do not get it right, advisers will not be paid.
The biggest issue is that each provider or wrap is handling adviser charging slightly differently. David Rouse, principal financial planner at Friar Gate Independent Financial Services, says: ‘The challenge we’ve faced is dealing with the differing requirements of all the product providers. Some of them altered the parameters in mid-December but didn’t adequately communicate the proposed changes and the timing of them in advance.’
Andrew Peters (pictured above), director of Deep Blue Financial, agrees that the changes in providers’ systems have thrown up difficulties. ‘There are problems and unclear issues regarding the processing of new business because the providers’ systems have changed considerably and we are retraining for these,’ he says.
In contrast, Bob Wilson (pictured below), director of GreenSky Wealth, thinks ACF will boost profitability in one area: annuities.
‘Previously, if you were dealing with a pension annuity purchase of less than £70,000 to £80,000, the commission from the provider didn’t cover the cost of the advice,’ he says.
‘So you would either take it on the chin in the hope that other business would be generated from that client, or ask the client to pay an additional fee. The new adviser charging allows you to choose the amount you are paid from the annuity provider. So the client has the option of paying a direct fee or allowing it to be deducted from the pension pot.’
A survey of advisers by Engage Partnership and Capita Financial Software carried out just before the RDR deadline reveals widespread concern over issues surrounding ACF. The research shows a lack of understanding and confidence among advisers.
Across the range of questions, typically only half (39% to 64%) of the advisers surveyed said they felt confident about crucial ACF issues. One respondent said: ‘ACF is a fudge and a mess, and we should have no part of it.’
David Criddle, chairman of Engage Partnership, says: ‘A number of firms have defaulted to ACF without working through the implications. They need to be very explicit with clients because of the risk of ACF distorting the advice. They need to be whiter than white and clearer than clear about why they are using it.’
Advisers can prove their choice of product was not affected by ACF by making it clear in the documentation and governance trails.
‘Firms also need to ask themselves whether they think ACF will still be here in five years,’ says Criddle. ‘We believe it is a short-lived transition vehicle and strategically the firm is weaker if it is relying on it.’
The RDR’s effect on legacy commission
Melony Holman, director at Compliance & Training Solutions, says legacy commission is one of the most difficult issues many firms will face over the next few months.
‘Recently we looked at different platform providers: they all have different charging structures in place, which came out quite late,’ she says. ‘Some advisers might be caught out. I can see legacy commissions turning off accidentally, and advisers need to be clued-up about what income is coming from where.’
Michelle Hoskin (pictured above), partner at The Adviser Partnership, agrees that the hard work is just starting for many firms. ‘Advisers and firms are often blind to the future and how to run their businesses efficiently and profitably because they keep getting dragged back by the legacy,’ she says. ‘They need to imagine there is no legacy, and start from there.
‘Many firms approached the new way of working as a tick-box exercise, doing the bare minimum to get RDR-ready. But there is still a lot more to do. I encourage firms to take it back to basics: imagine they were starting up a business from scratch tomorrow, and then ask "why", "how" and "what", in that order,’ she says.
The next steps: Wealth Matters
The big change the RDR has brought for Bedfordshire-based Wealth Matters is the retirement of one of its advisers in December, who chose not to take the exams required by the new regulations.
The firm took on the adviser, Mike Shaw, three years ago when it acquired his company, Independent Direct Consulting.
‘Mike was a fee-based adviser but he didn’t want to do all the exams,’ says Julian Gilbert (pictured above), director of Wealth Matters. ‘He stepped down, and the remaining advisers and administrators are managing his clients.
‘We have spent the past two years getting Mike’s clients onto the same investment system and the same risk-profiling tool.’
The new regulations do not prohibit Shaw from speaking to clients, but he is no longer permitted to provide advice. ‘I am still happy for him to attend meetings,’ says Gilbert. ‘Clients don’t necessarily understand the RDR: for them, it is about the relationship.’
Adviser Jonathan Cleworth also left the firm recently, following a relocation, leaving it with just three advisers.
Gilbert says: ‘That means our growth is going to be more gradual now. We did think carefully about [taking on] another adviser. But we are recruiting a new administrator instead, who will deal with smaller queries and cases as much as possible. Most client issues are administratively driven once they are set up on the platform.’
Gilbert says he never agreed with the RDR and admits this often makes him a lone voice at Institute of Financial Planning events.
‘The RDR will mean many people in their 30s or those on a lower income will not receive financial advice, though they are earning too much to be helped by the National Employment Savings Trust (Nest),’ he says.
‘Fee-based financial planning for the top 10% or 20% of the population is a good thing, but you need something in between [that and Nest].’
Gilbert says that although the Financial Services Authority was right to make advisers take the exams, the regulator should simply have promoted fee-based advice to consumers and not enshrined it in regulation. ‘The RDR is overkill,’ he says.