Return of ‘free advice’ fallacy flies in face of RDR

This week, all of the major news stories have been redolent of a (recent) past: Oscar Pistorius’s televised trial in South Africa is an exercise in popular jurisprudence that brings memories of OJ Simpson in the 1990s; while the Maria Miller scandal brought to mind both the MPs’ expenses furore in 2009 and any number of fractious political departures through the ages.

Within our own sector, the news agenda remains dominated by the Budget pension reforms and in particular the eye-catching ‘free’ advice pledge, which itself reignites pre-Retail Distribution Review adviser charging debates.

Nothing in life is for free

Since the advent of the RDR the industry has been banging on, quite rightly, about how advice is not free and it never was, despite some members of the public believing it was due to commission.

Chancellor George Osborne’s announcement seems to fly in the face of this. During his Budget speech, he announced that provider will have to provide “face-to-face advice” to all retirees.

When the consultation document was published, minutes later, it referred only to a ‘guidance guarantee’. All individuals in a defined contribution pension will be offered free, impartial guidance at the point of retirement, it said.

The issue is,in our industry ‘guidance’ and ‘advice’ are two very different things; in order to give the latter, qualifications and fees are needed.

As my dad regularly says ‘nothing in life is free’, so who will fund this ‘free’ advice pledge? The answer is the consumer and the industry, according to the head of the Association of British Insurers.

Otto Thoresen told MPs this week that guidance would only be “free to the consumer in the sense that they won’t be writing out a cheque and it will be paid for...by the industry”.

However, he added: “Actually a contract-based scheme ran by insurers is one thing but a trust-based scheme will have to find resources and it will be paid for... by the consumer in the end”.

Another story published this week warned that free pension advice will be “borne by all”. A Towers Watson’s senior DC consultant for global pensions said “calling guidance free will not make it free to provide.”

Graeme Mitchell, managing director of Scottish Borders-based Lowland Financial, argued that advisers should be the ones to deliver this guidance as they already give people “free consultations”.

For what it’s worth, Mr Thoresen also raised the issue of whether the advice would be ‘face-to-face’ for most - he said those with less than £30,000 didn’t need such direct servicing - and others have called into question how impartial a service offered through providers can be.

At this stage, there seem to be more questions than answers on this pledge - which is ironic, becuase that that, too, is reminiscent of almost any financial services initiative launched in recent years by the government or regulator.

Disclose fees but not your proposition switch

The FCA published its second RDR implementation thematic review this week, which revealed it is ready to crack that whip on those advisers who are not adequately disclosing fees. This was the story that garnered the most attention on FTAdviser this week.

The regulator found ‘disappointing’ results which suggested that firms are still not being clear enough on how much their advice will cost clients.

The review also found people are still not being honest with their proposition. The FCA found 31 per cent of firms offering a ‘restricted’ service were not being clear they were ‘restricted’ or the nature of the restriction.

Also, 34 per cent of firms failed to give clients a clear explanation of the service they offer in return for an ongoing fee and/or their right to cancel this service, the FCA said.

The FCA later clarified that advisers do not have to tell clients they are restricted until the actual client meeting, meaning that a restricted adviser does not have to use the word restricted on their website or advertising material.

In an interesting turn of events, the regulator told me yesterday that advisers who have changed their proposition from independent to restricted or vice versa need to disclose this to their clients “as soon as possible” if clients are paying for an ongoing service, but they don’t need to if clients are not paying for ongoing service.

A FCA spokesperson said: “Where an up-front fee has been paid, for an ongoing service, we would expect a firm to treat customers fairly and make clear, as soon as possible, any changes to the services agreed.”

What is going on with legacy?

An interesting survey from Panacea Adviser revealed this week there is a lot of adviser confusion and misunderstanding around legacy commission.

Advisers wanted to know how trail is generally affected by the removal of rebates on platforms on legacy business by April 2016. Some advisers also believed that a formal end date for all legacy commission was in sight.

Actually, the FCA is looking into this but there has not been an announcement. The FCA’s concerns is that advisers may be leaving portfolios ‘undisturbed’ to prevent upsetting the revenue stream, to the detriment of clients.

The FCA said that it will provide clarity if Panacea Adviser proves this area warrants it.

I don’t understand why the FCA doesn’t just issue guidance anyway: confusion is real, whether the FCA believes it should be or not.