So here we are. After years of build-up since the new regime was first mooted, the long-awaited date of January 2013 is now just days away.
The retail distribution review (RDR) will overhaul financial advice in many ways, but among all the speculation and scaremongering, the key detail that everybody keeps returning to is the enforced end of financial advisers’ long love affair with commission.
At its most basic interpretation, the abolition of commission will only represent a semantic shift. Ultimately, under the commission structure, the client wound up paying for advice and the adviser ended up getting paid. Under the new system, the same will happen, but the money will come from different pots and the client will have to understand they are paying for it.
Of course, it is this understanding that they are paying for advice that is the issue. Some advisers, probably rightly, are terrified about explaining to clients that they will have to pay for advice that they have previously perceived to be ‘free’.
Although I am not convinced that many people did genuinely believe the advice to be free, it was more a case that they simply didn’t ‘feel’ the money going. I have an online betting account. I have learned to my cost that it is much easier to bet large amounts when you are typing a number onto a screen than actually handing notes over. It’s the same with fees – seeing a deduction against an investment does not register in the same way as physically paying for something.
Whether clients ‘felt’ it or not, the main problem with the structure was never to do with the commission itself, but rather the system’s inherent lack of transparency.
Commission left you all open to suspicion. I’m sure the overwhelming majority of advisers only ever recommended the most appropriate products for each client, with no regard for their own level of remuneration.
I’m also fairly sure quite a few didn’t. One of the larger life offices once told me that a data-entry error had left it accidentally paying a couple of percentage points extra commission on one product. The mistake only came to light when they needed to find an explanation for a sudden spike in inflows.
Even if we convince ourselves that example was not typical and represents the exception rather than the rule, the structure left the entire advice industry open to accusations of a bias towards higher-paying products.
And if commission didn’t lead to this product bias, surely that in itself is an argument for its abolition. It was fundamentally pointless.
The main beef advisers seem to be clinging onto is that they feel persecuted. They will rightly point to other areas of business where commission is still permitted. Notably protection products will still pay commission, although some other examples are less convincing.