Feb
2013
In Praise of the Retail Distribution Review
DIY Investor
22 February 2013
In December 2012 the Financial Services Authority (FSA), the City regulator, introduced a package of important reforms which affected everyone saving for a pension or investing in an ISA.
Following a spate of difficulties and miss-selling scandals, the financial services sector changed forever following the introduction of a package of important financial reforms known as the ‘retail distribution review’, or RDR.
- RDR turned the economics of the financial services industry on its head
- professionalised the provision of financial advice
- put the consumer in charge of how your money is spent.
‘The ‘free’ advice that was being dispensed was nothing of the sort.’
To make sense of the future, it is worth understanding the past. Previously, advisers have taken unseen commissions for recommending certain financial products to their clients.
The ‘free’ advice that was being dispensed was nothing of the sort, and neither did the rate of commission bear any resemblance to the suitability or the performance of the products that were being recommended.
With differential rates of commission on offer, there was nothing to prevent the advisor from recommending products from which he earned the greatest return, with no recourse to the customer.
Doesn’t seem fair does it?
Well that’s because it patently wasn’t.
There are thousands of pension and investment plans on sale but when you turned to a financial adviser – even a supposedly independent one – you previously encountered a glorified salesman, pushing you into products that pay high commission.
Given what you now know, would you trust them?
So, despite your good intentions, you do nothing and don’t save for your future, because you’re scared of getting ripped off. RDR changes all that.
‘It’s not necessarily about cutting costs to the bone, more about ensuring you get value for money’
It does two things. First it says all advisers have to pass a higher qualification by the end of this year. Instead of having an A-level equivalent to ply their trade, advisers must have the equivalent of a first year degree course at university.
Many advisers have gone a lot further and have taken diplomas or become chartered or certified financial planners.
This means there is a good chance nowadays that when you see a financial adviser or wealth manager they actually know what they’re talking about.
Secondly, and even more important, RDR abolishes commission.
Financial advisers will no longer be paid by the providers of the products they sell.
They will be paid by their customers, with whom they have agreed their fee, which is a profound change.
It means advice is no longer ‘free’ but it is far more valuable. It means advisers are working for you, not the pension or investment company.
It also means that if you don’t use an adviser, you should see the costs of investing fall, and as has been proven, the most significant contributory factor to a successful outcome to an investment strategy is keeping costs to a minimum.
RDR ‘unbundled’ the charges investors pay.
The adviser charge will no longer be part of the product charge.
DIY investors saw the annual charge of investing in many mutual funds halve or fall by at least a third: from 1.5% a year of the money they invest to 1% or even three quarters of a per cent.
Undoubtedly, writing a cheque for an adviser takes a lot of getting used to, but it’s far more transparent.
As a result of RDR all of us are in a better position to see how much we’re paying and what we’re getting in return when we invest and plan for the future.
It’s not necessarily about cutting costs to the bone, more about ensuring you get value for money.
Whilst it may not yet be a topic of discussion around the dinner table, RDR represents a significant change to the financial services industry and is a great benefit for those looking for certainty and understanding when contemplating their financial affairs.
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