How advisers are finding income post-RDR

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How advisers are finding income post-RDR

“It has rightly focused advisers’ minds on ongoing service rather than product sales,” she says.

However, she admits one drawback: advisers now need to service fewer, but more affluent clients, due to the mounting costs of providing advice.

 Indeed, the latest Heath report reveals a dramatic drop in the number of clients per adviser, from 231 in 2010 to 160 in 2017.

The Financial Conduct Authority recently announced a drop in adviser fees of 1.1 per cent in a bid to reduce the collective cost on advisers to £79.4m, but many advisers are still concerned by the mounting costs of professional indemnity insurance.

In such a fast-changing regulatory environment, where costs for giving and receiving advice remain high, how are advisers finding income?

Value for money

According to Kay Ingram, director of public policy at LEBC Group, there is no question the RDR has been a success in raising standards of advice through the advance of professional qualifications and has removed the conflict of interest inherent in the payment of a commission.

“The challenge for advisers now is to make the value for money case for advice, paid for by the client,” she says.

She explains: “Those who use a financial adviser generally express a great deal of satisfaction with the advice they receive.

“The FCA’s own research showed 65 per cent of consumers questioned were very satisfied with the advice they had received and the price they had paid for it.”

She adds: “[Therefore] articulating what advice can offer is key in persuading more consumers that it is worth paying for.”

But according to Dr Matthew Connell, director of policy and public affairs for the Personal Finance Society, many advisers were having a conversation with clients about how they were paid well before the introduction of the RDR.

He explains: “Most clients welcomed this – they knew that advisers had to earn a living, and were reassured about them being open about how they were paid.”

He continues: “The ban on commission that came with RDR reinforced this trend, and now many advisers tell me that clients have moved to write them a cheque for up-front advice rather than using contingent charging, because this gives them greater clarity about what is being spent on advice, and what is being invested.”

Contingent charging

Contingent charging for defined benefit transfer advice, where a client only pays for the advice if they go ahead with the recommended course of action, remains a highly contentious issue within the industry.

The Work and Pensions select committee recently reiterated that a ban on contingent charging would be the best way to protect clients after it completed its inquiry into the practice, but offered to take suggestions as to how the issues might be addressed without banning it entirely.

But there has been a substantial debate within the industry on contingent charging and the potential conflict of interest inherent in it, points out Gemma Harle, managing director of Intrinsic’s financial planning and the mortgage network.

Ms Harle says: “At Intrinsic we strongly believe that a ban on contingent charging would worsen customer outcomes because, in its purest sense, contingent charging means an adviser will only get paid if the advice is a recommendation to transfer.

“Given we already know that, in most cases, the advice to proceed with a transfer is unlikely to be the right advice, there is a potential conflict of interest that needs to be managed and we believe this is best achieved by separating the giving of the advice and the decision to proceed.”

She continues: “Some firms already implement a process that requires multiple approvals before a transfer is processed. So not only will a pension transfer specialist need to give advice, that advice will have to be checked by another specialist, giving the client confidence in the advice they are receiving is impartial and in their best interest.”

However, Ms Ingram says LEBC Group supports the WPSC’s recommendation to ban contingent fee charging because it throws into doubt the impartiality of advice to transfer.

She says: “LEBC also believes that the practice means that those who do transfer are subsidising those who do not and this increases the cost of advice and rejects the argument that a ban would mean that advice would be beyond the reach of many consumers.”

She continues: “More can be done via the workplace to provide guidance prior to pay for advice and use of the employer-sponsored tax-free £500 per year which each employee can use to access advice on pension transfers and other matters.

“Only charging those whose circumstances mean that a transfer is a viable option is not a sustainable business model, nor a fair pricing practice.”

While Steven Cameron, pensions director at Aegon, suggests it is important to offer consumers choices over how they pay for advice and has urged the FCA to continue to seek methods of managing any conflicts of interest.

He suggests: “The Personal Finance Society’s Gold Standards on pension transfers include many useful approaches here.”

He continues: “Aegon is particularly supportive of introducing a standard form of triage which would offer individuals some initial help to assess whether or not it is worth seeking advice on transferring.”

He adds: “A cap on the level of contingent charging is also worth considering. Aegon has concerns that a complete ban would make the ‘advice gap’ in this area worse and should only be implemented as a last resort.

“We hope the FCA will now build on PFS work and explore the other potential solutions suggested by the WPSC.”

The FCA recently announced it is calling for industry's input on the role of regulation, admitting some of its rules may harm advisers and their clients.

New opportunities

It could be argued that there has never been a better time to be an adviser as the demand for advice has steadily been on the rise, suggests Verona Kenny, head of intermediary at Seven Investment Management.

She explains: “A large part of this is thanks to the pension freedoms which has created the need for clients to continue to receive advice throughout decumulation; there is a huge opportunity for advisers to help clients in both the accumulation and decumulation phases.

“While advising during drawdown can be a valuable revenue stream for advisers it also presents some significant challenges, such as ensuring clients do not run out of money during retirement.”

She adds: “This is where a centralised retirement proposition and associated retirement investment solutions can help to ensure clients’ retirement pots last a lifetime.”

victoria.ticha@ft.com