RDR has increased transparency, but at what cost?

While I generally agree (and as a journalist I would, wouldn’t I?) that an increase in transparency is a good thing for the customer, not least in terms of who is making a pretty penny from the pounds they invest, some disturbing potential side-effects are beginning to come to the fore.

One story in particular has simply not garnered the attention - and outrage - that it deserves.

Last week FTAdviser sister title Investment Adviser revealed that fund groups are planning to offer preferential rates (so-called ‘superclean’ share classes) only to those firms that can ‘influence’ distribution. They even suggested they may bypass platforms in favour of ‘restricted’ advisers operating panels that would be more effective at channeling business their way.

It hardly sounds “super” or “clean”, does it?

An independent financial adviser who is honour-bound to review all available offerings and objectively determine which best suit his or her client’s needs cannot influence distribution - nor for that matter can a platform in theory.

Restricted advisers on the other hand are free to operate with product ties as they see fit. FCA rules state they must not make a profit for themselves out of any deal they strike, but there is nothing wrong with them offering a more competitive price for funds as part of an arrangement with a panel firm.

This morning a report from Barclays posited that large restricted firms such as St James’s Place, Openwork, and (soon-to-be fully restricted) Sesame will be the ‘winners’ of the RDR and the drive to “superclean” share classes in the wake of the FCA’s ban on platform rebates.

The report claimed that advice firms are able to take advantage of their customer relationship to increasingly control distribution.

There are already several barriers to true independence: time demands are staggering, the regulatory burden is massive, and the potential liabilities for compensation are correspondingly intimidating.

Now we have one more. What happens when your client comes to you, an IFA, and tells you he can get the same product for cheaper down the road at your restricted competitor XYZ Financial?

Let’s extrapolate even further. Where could this lead long-term? I’m imagining a high street with several different restricted shops, all competing on price for their particular products instead of examining the whole of market for whatever best meets the client’s needs.

And this is apparently where we are heading. One of the authors of the above study, Clive Waller of CMC Research, stated during a lively Twitter debate following publication of the above story that the market was “moving towards commoditisation” and “a lookalike high street”.

The whole purpose of being for the FCA (and FSA) and their cherished RDR is and was to protect and improve customer outcomes. Transparency was one of the key strands to achieving this, but I’m not sure this progression is what the regulator had in mind.

The worst of it is that advisers want to be independent. A survey in March found that only 13 per cent of IFAs predicted they would become restricted within a year of RDR.

On the other hand, anecdotal evidence produces multiple examples of firms shifting to restricted and claiming independence is simply “not feasible”.

If in the long run we lose the whole essence of whole of market advice due to independence being hard to maintain and restricted looking increasingly commercially attractive, we’re back to what looks like a sales-led model.

Is that really benefitting consumers?