Why structured products might suffer in RDR zero-sum game
Nature of remuneration based on in-built commission that is paid up front could lead to some difficult discussions.
Another week passes, another inflammatory comment about adviser remuneration post-Retail Distribution Review provokes opprobrium among readers.
The latest polemic discourse came from Nigel Speirs, the outspoken head of distribution for Sanlam UK, who said in an interview with FTAdviser last week that the move from commission to adviser charging will have a negligible effect due to provider facilitation.
Mr Speirs said that if the changes had meant that all clients would have to “get out their cheque book” then business levels “would have fallen considerably”.
However, because the charges will be paid out of the product in the same way and simply delineated in client documentation, he said that payment rates would remain at the same level and be paid in broadly the same fashion.
Undoubtedly this is provocative stuff and it duly elicited a variety of vociferous responses on both sides of the debate.
Most structured products offer a base return that is identical to the amount paid in - it is easy to see how the cost of the advice is hidden
Reaction ranged from those stupefied that anyone could be expressing surprise at the fact that charges and payment methods will be analogous post-RDR, saying this is not only obvious but actually the point of the change, to those vehemently asserting that fees will actually rise.
Underlying all of this, of course, is understandable concern over how clients will feel about paying directly for their adviser. Fears have been exacerbated by all manner of surveys in recent months - such as this one published by Ernst & Young last week - suggesting people will not part with money for advice when it is made clear it is not free.
I’ve railed against this before, but it’s worth restating my own strong belief that such surveys are most often weak, self-serving and misleading.
Do the people asking the questions state to respondents, for example, that while they will pay directly in one way or another for their adviser, there will be a corresponding drop in the price they pay for many of their investments once commission is stripped out?
That such a key piece of information is not discussed in any way in the published reports leads me to conclude that this is not being communicated, rendering the entire exercise pointless and frankly disingenuous.
I believe, in fact, that the move to fees will not be as deleterious to the sector as many have suggested. Yes, advisers will have to explain that they are taking a fee - the good ones will have been doing this anyway - but it is essentially a zero-sum game and clued-up investors will recognise and appreciate this.
However, in some isolated instances perhaps this view is indeed, as has been claimed previously, somewhat quixotic.