One of the unintended consequences of the Retail Distribution Review was the rise in non-advised annuity propositions.
Although the new RDR rules came into force on December 31 2012, many companies started setting up non-advised services well in advance.
RDR gave an unfair advantage to non-adviser brokers over regulated advisers in two ways: first, commission was retained for non-advised sales and second, annuities salespeople did not need any qualifications.
This created an unfair situation where advisers were faced with much higher regulatory fees and obligations and quite rightly were required to be completely transparent with fees.
I should point out that there were important differences between the non-advised annuity services offered by insurance companies and annuity brokers.
Brokers were whole-of-market and specialised in enhanced annuities, whereas insurance companies were offering their own version with perhaps a link to single company for enhanced annuities.
However, both models capitalised on the public’s perception that the most important part of arranging an annuity was to get the highest income and little else mattered.
Also, many people think they can make complex decisions themselves by simply shopping around for the best annuity rate.
This message is reinforced by marketing that suggests they can get up to 40 per cent more by shopping for an enhanced annuity.
The advice gap
One of the unintended, but predictable, consequences of RDR was the creation of the so-called advice gap, where a significant number of people were given the impression that financial advice was outside of their reach.
Many people believed that advice was not for them because it was too complex and too expensive.
It can be argued that non-advised annuity services fulfil a useful role because they allow people who fall into the advice gap to get help when arranging their annuity.
But the problem with this is that most people need lots of help before making such an important financial decision.
Non-advised brokers do give their customers help, but it is help from a one-handed salesperson. I once had a client who said: “Give me a one-handed adviser, because you keep saying on the one hand this and on the other hand that.” He missed the point that good advice requires looking at both sides of the argument: that is, lifetime versus fixed-term or annuity or drawdown.
Non-advised brokers can give information on both, but cannot discuss which one is right for their customer because that is advice.
Another problem is that not getting advice is not cheap.
If you go to a popular annuity broking site and get a quote for a £100,000 smoker annuity you will see the commission is more than 3 per cent, that is, £3,000.