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Linda Woodall: Don’t be caught unprepared for RDR

Boris Johnson’s Olympic catch-phrase : ‘Don’t get caught out’ is sound advice as we prepare for the RDR.

By Linda Woodall | Published Oct 01, 2012 | comments

When it comes to deciding how best to invest money, many people rely on and benefit from the expert advice of professional advisers.

Often people are coming to investment advisers with their life savings, trusting them to make that money grow and counting on them to provide an adequate income in retirement. The conversations clients have with their investment advisers involve life decisions and often play a pivotal role in their future – the decision whether or not to purchase an annuity, for example, can have life-changing consequences.

That’s why investment advice is so important and why the FSA thinks it is essential that people have confidence and trust in the help and advice of these experts.

With the RDR deadline less than five months away, it’s time to embrace the changes that both regulators and industry have worked so hard to achieve

The end of this year will bring the biggest change to the retail investment advice market in decades. Most advisers are well on their way to being ready for these changes. Looking beyond the retail advice market, we have seen more and more product providers launching clean share classes, which strip out commission paid to the adviser and the charge for a platform. These RDR compliant share classes of roughly 0.75 per cent, instead of the bundled annual management charge of 1.5 per cent, offer good value to clients and allow advisers to deliver a cost-effective solution that maximises the client’s ultimate return on investment.

Concurrently some platforms are ahead of the curve in charging their customers directly on a monthly or annual basis for the service provided.

Unsuitable products

The FSA is largely agnostic about what kinds of products investors should invest in – with the notable exception of those products which should never be sold to the vast majority of retail investors, like unregulated collective investment schemes (Ucis). Ultimately the FSA wants investors to be in the products that are right for them.

When it comes to making a personal recommendation for a client, it all comes down to suitability: if a client’s needs, circumstances and attitude to risk suggest that a higher risk strategy would work for them, then advisers should feel free to pursue this, provided they avoid pitfalls such as excessively concentrated holdings and can clearly evidence that this is the best option for the customer.

Cost is another important factor to bear in mind. If high charges mean that a certain product is not good value for a client, then it is unlikely that this product will be in the client’s best interest. If an adviser is giving a personal recommendation to an elderly client, then a product focused on producing returns over the long term is unlikely to be suitable for their needs.

Many have probably already decided whether your offering will be independent or restricted from 2013. Some have asked how they can provide independent advice through a team approach. There may be cases where an adviser may wish to consult an experienced colleague on a particular subject before delivering a personal recommendation. But ultimately that personal recommendation must meet the standard of independent advice. It is the firm’s responsibility to have appropriate systems and controls in place to ensure each personal recommendation meets the required standard, regardless of the approach that is taken.

Those who have considered going down the independent route have asked what is meant by the relevant market. The relevant market is defined by the client, not by the adviser: it is whichever set of products is right for that particular client. So if, for example, the client only wanted to invest ethically, immediately many investment solutions would be struck off the list. Global equities funds which have stocks in the oil and gas, tobacco and alcohol sectors would be excluded. An ethically minded client may wish to go to an advisory firm which holds itself out as independent but only within the area of ethical investment. This firm could call itself ‘Greenfield, providing independent advice on ethical products,’ but not ‘Greenfield Independent Financial Advisers,’ as this would imply that they look at every retail investment product that could be right for a customer, when they actually only look at ethical products.

With the implementation deadline less than five months away, it’s time to embrace the changes that both regulators and industry have worked so hard to achieve. Many are making speedy progress towards meeting the professionalism requirements, but more need to honing in on a sustainable charging model. The FSA is committed to helping advisers achieve a charging model which works for them, their clients and for the future.

Ultimately it is up to the adviser to drive this forward. The best starting point is the clients being represented. The onus is on the adviser to consider whether they should divide their clients into different segments with different needs, whether some clients will need an ongoing or a purely transactional service, how much the clients will be willing to pay and how they will pay.

Think about this now before it’s too late. Any London-based advisers will be familiar with mayor Boris Johnson’s catch-phrase for travelling during the Olympics: ‘Don’t get caught out!’ This is sound advice for all as we prepare for the RDR.

Linda Woodall is head of investment intermediaries at the FSA

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