Pitfalls in regulating DIY investments

The growth of execution-only – in other words, DIY – investments has always been an obvious consequence of the RDR.

Inevitably many investment advisers will wish to keep up contact with their clients in the early phase of their financial lives, when they are still accumulating capital. New regulation, however, has made that much more difficult and costly to achieve.

Simplified advice – the most restricted form of advice under the regime – looks like the dampest of squibs, for the simple reason that it sounds very much like full advice and, thus, must be roughly as expensive to deliver. For these reasons and more, execution-only services certainly look to be at least part of the answer after 2012.

The situation has made regulators nervous because they fear that some advisers will get it wrong.

FSA technical specialist Rory Percival has apparently questioned whether firms are disclosing the facts appropriately and clearly to customers. He said clients cannot claim that they have not received suitable advice if they lose money on products on which they never took advice on in the first place. This makes proper disclosure all the more important.

The other warning came from the Financial Services Consumer Panel in a recent paper on the RDR: “We have been concerned that consumers may increasingly be offered ‘execution-only’ services.

“While for many this will be absolutely right, for some it could lead to poor choices and poor outcomes. The banks may readily step in as a natural access point to this market, but given their past behaviours, we have not been convinced of this as a solution so far.”

As the panel points out, IFA businesses are not the only place where things could go wrong.

In fact, a host of organisations are looking to execution-only. Inevitably these include some banks and many IFAs. But it also includes the comparison supermarkets which must be casting their eyes over the RDR and wondering to what extent they can benefit.

Revolution

The big driver in all this is the RDR, but it is certainly not the only one.

The internet has revolutionised things in the past decade but it has been as much about a revolution in behaviour and attitudes as a revolution in technology.

For example, a decade ago many advisers felt it unnecessary or unwise to give clients online access to too much information. Now it is practically a basic requirement.

The growth of execution-only has to be seen as part of this trend. It also seems quite strange that advisers have been happy to watch Hargreaves Lansdown grow bigger without some sort of riposte.