Everyone knows about the RDR and the impact it stands to make on the UK’s retail investment market. Although the Retail Distribution Review may appear far off, objects in the mirror are closer than they appear, and in three short years it will be upon us, changing the face of the profession forever.

All financial advisers will face key challenges to meet the tough new requirements, from getting the qualifications and capital to back their businesses to adapting adviser remuneration arrangements to changing their strategies to attract profitable clients. With many opinions on how to go about meeting these problems head on, IFAs are clamouring for clarity so they can prepare and be ready for the arrival of the implementation of the RDR.

Joining us to answer all your questions is Nick Bamford the Chief Executive of Informed Choice ltd and has two decades in experience in the financial services profession. He’ll be on the live WebTV show to answer questions from IFAs about fee structures and capital, along with Danny Wynn, the RDR and Commercial Director at Legal & General Savings. Log on to submit your questions live, or alternatively use the form above to submit them ahead of the show.

H: Glen Thompsett, host
N: Nick Bamford, Chief Executive, Informed Choice Ltd
D: Danny Wynn, RDR and Commercial Director at Legal & General Savings


H: Hello I’m Glen Thompsett and welcome to the Business Show.  Now then, if you work in the finance and investment sector you’ll probably be all too aware that the Retail Distribution Review is set to change the face of industry forever.  With three years until full implementation now is the best time to make plans to ensure your business is prepared for its impact.   Well joining me today to discuss RDR and explain what it could mean for you, is Nick Bamford whose the Chief Executive of Informed Choice ltd along with Danny Wynn, the RDR and Commercial Director at Legal & General Savings. Gentlemen a very good afternoon to you and welcome to the program

N: Thank you

H: Nice to see you.  Don’t forget before we start having a chat with our guests this afternoon, we are streaming live, so if you want to send your questions to us just type in the box on the screen, click the send button and of course we’ll do our best to tack them over the course of the show.  Danny, start with you if we can today, now if the Conservatives win the General Election next year, it’s all been publicised, we know there’s a General Election coming along next year – are the Conservatives likely to have the power to put the RDR implementation on hold, do you think?

D: I think they certainly will have the power, if they get in, but I think it’s very unlikely that they will – a number of reasons.  I think the first and most obvious is that the rules to implement the RDR will be in the rule book before the election so whoever it is would actually have to come in and purposefully – purposely delay it or take them out and replace them with something else

H: So they’re set in then stone presumably are they?

D: Set in stone.  They are in the rule book, and that means by default they will happen, because some of the measures in the RDR will actually come in in 2010, for example new advisors can’t start qualifying – can’t start advising in the industry without QCF level 4 in 2010, it’s only the existing advisors that have got until the end of 2012 to get their qualification levels up.  And the other reason I think it will be delayed is – ok the Tories have talked about disbanding the FSA, but they’re going to replace it with a Consumer Protection Agency who are going to have to pick up the rule book, who will already have the  RDR in it and run with it.  Those people are likely to be recruited from the existing FSA and probably even based at Canary Wharf, so can we really expect there to be any change?

H: Ok, we’ll come on to the qualification aspect of it a little later in the program, but Danny why has the FSA excluded protection products and GEBs – G-E-B’s from RDR proposals, do you think?

D: Ok if we take them both separately.  I mean the Retail Distribution Review was set-up to focus on a specific set of market failures that the FSA had identified in the market for retail investments.  Protection isn’t retail investment, so it was out the scope of the review.  They are actively considering whether they should read across some of the measures into protection, and we should find that out in December

H: Ok

D: As for GEBS or structured deposits, to give a more technically accurate term, that I think it’s really just timing.  Structured deposits, they form – the manufacturer of those products actually comes within the banking
code as opposed to the investment code book that the FSA regulate the industries with, and that code, that source book was very new at the time the RDR started, so they left those products out of scope.  They are in scope of a similar review, or an equivalent review that’s going on in Europe, commonly known as the Prip review so we would expect that structured deposits will come in at some point

H: It’s a question of timing I guess, is it Nick?

N: Yes I think so I think I’ll pick up on Danny’s point earlier, I think it would be a pretty dangerous business strategy to expect the timing or actually the implementation of the RDR to be either abolished or delayed, I think you know you run a real risk in business if you’re not already preparing you know for the changes that I expect most of us think will happen.  And on the subject of protection in particular I rather hope that stays in the scope of the Retail Distribution Review.  The thrust of it was all about pensions and investment advice and I think that protection advice probably could stand free from that

H: Let’s ask you whether an IFA has to advise on all investment products, and be able to offer independent financial advice?

N: Well I think it’s interesting the way that the FSA is defining what independent advice looks like, because my view would be one of actually it doesn’t have to encompass product at all.  I think it’s perfectly valid to be able to describe yourself as an independent advisor but not actually coming to the point where the client – where you’re recommending any kind of product solution.  But the FSA is determined that that’s going to be their definition of independent advice is going to be about the range of financial products and instruments that I as an independent looks at.  So yes that’s widening, and we’re seeing a need to look at structured products and all kinds of ETF type products as well as the packaged products that currently defines what an independent is

H: Danny Wynn, when we talk about defining independent advice, I mean what does this actually include? There must be a whole raft of different products out there

D: Yes absolutely.  IFAs are very familiar with what’s termed the packaged product, so everyone’s familiar with bonds and pensions, unit trusts, OIKs,  and even some forms of investment trusts, are in the definitions – as are ETFs but many people don’t realise.  The new definition gets significantly wider so all forms of investment trusts, even an unauthorised unit trusts and OIKs have to be included, and we’re not sure yet about REUTs and VCTs but there’s potential they even may be included

H: Yes I think so

D: And then the other big area, big part of the industry that’s included that hasn’t been previously is structured products

H: Ok

D: Structured investment products

H: Let’s get onto advisor charging and VAT Nick.  Should clients be charged an hourly rate and if so how much?

N: Well I think if the business model of the intermediary is to charge their clients on an hourly rate and that hourly rate is known between the intermediary and the potential client, then fantastic.  It’s not a charging methodology that we use within our firm, we prefer a project fee.  But I think one of the other things that’s come out of the Retail Distribution Review and in the way in which it’s being debated, is the suggestion that it is about charging fees, and I think that’s a bit of a growing myth, it’s fundamentally not the case.  Advisor charging can still result in the advisor making a product recommendation and agreeing the price for the delivery of advice and the implementation of that product, and being paid from the product.  So I think, I think between advisors and clients it’s going to be about choosing  the most appropriate method of charging for the services that are being delivered

H: So are IFAs saying they’ll charge clients an hourly rate for advice – that will be putting a lot of customers off I would have thought

N: Well I think again if we go back to the sort of previous environment in which disclosure of independent status was giving the client a choice between paying commission for a product delivery or offering to charge them a fee for that, I think that’s probably where this hourly rate issue has come from because if we look back to the disclosure documentation that the FSA created, very often what was said in there was the hourly rate being charged was x pounds per hour and I think a lot of people have probably got it into their head that charging fees is what the RDR is all about and charging hourly fees is also about you know the thrust of it, and that’s just fundamentally not the case

H: And what about the good old VAT, where does that sit with all this?

N: Well I think what I would say there is any independent financial advisor firm should be taking care – guidance – from their accountancy services to determine whether they charge VAT, but in my mindset you charge VAT if you’re delivering advice, if actually that advice results in the implementation of a financial services product then I don’t think VAT is relevant there

D: Well I think the situation is a little bit more complex than that – there is a specific exemption for arranging a financial services contract, which means those services are exempt from VAT. Where an advisor or a business tries to charge one charge for advice and implementation, the local tax inspector will take a view on what is the lead service.  If the lead service is advice, then it all becomes subject to VAT.  If the lead service is implementation of a financial services product then it’s zero rated.  What we’re seeing actually is many businesses start to separate the activity and I believe yours does Nick?

N: Yes

D: So you charge a fee for delivering advice on a financial plan, that would very clearly be subject to VAT and then a fee for implementation that would be exempt.  And that also has the advantage that if the customer decides to take your advice and then implement themselves you’ve earned your money for the work you’ve delivered

H: What happens when the client takes advice but does the implementation themselves, as we mentioned, does that mean the client avoids paying the fee overall?

D: That would depend on the advisor’s fee structure and that is up to the advisor, if they want to run that risk and create a fee structure that means the client owes them nothing until they’ve implemented a product, then that is always a risk that they’re going to run, and it’s a risk that the firm will know about when they set up their fee structure, but no one’s saying that’s what their fee structure needs to look like

N: I think it’s about engaging properly with the client and making sure they understand what they’re paying for. But coming back to the VAT thing I think it would be very helpful if both FSA and HMRC could get together and come up with some – you know - really good, definitive statements on this subject, because there is a bit of confusion out there in the marketplace, and coming back to the point there Glen about clients receiving advice and then going off and implementing for themselves, I think that’s going to become quite a normal

H: Do you?

N: Series of steps in the future, and therefore it make real sense for the advisor to engage and charge in delivery of advice, if they’re going to empower people to go off and implement for themselves

H: Ok.  Danny question for you – how do fund and product platforms actually help in this?

D: They have a real role to play in helping firms administer their advice charges, especially where they want to administer those charges through products.  So many firms will set an advice charge that is dependent on the level of assets a client holds, or maybe just independent of the value of any one product, it could be an hourly fee, it could be a project cost.  They want that funded, or the contributions of that funded through product, they want to collect it through the product. Now many client’s portfolios will have a range of products.  No one product will know the value of the others, so really all the advisor’s ever doing is asking the product or the manufacturer to administer a contribution to a fee pot, yes, that they will then reconcile and take the fee out of.  If you try and do that yourself as an advisor, you very quickly come in to the realms of money handling, possibly even discretionary management and that reeks havoc with your FSA levy and your PI cover, whereas you can go to a platform and they’ll do it for free. Or – a much lower cost than otherwise.  So I think that has a real – appeal to some businesses

N: Yes I think it’s about driving some efficiencies into the business, and whilst I would never say one platform or one rap platform is going to deliver everything for the intermediary firm might possibly need in order to deliver solutions to its clients, I agree with Danny again that I think it’s about how you become efficient at engaging with a client and charging for those services that you’re going to deliver

H: Begs the question then should IFAs use only one platform?

N: This discussion is going to run and run isn’t it?  I think again my view would be no, I don’t think there is yet one platform that we could say delivers everything that as an intermediary firm we want, and I think we could look – outside of the UK we can look at the feedback we get from Australia which has a much more mature usage of this kind of technology, and typically the independent intermediary is using two – two-and-a-half types of different raps. You know one is the core one for most of what they’re doing and then they’re probably using the others for specialist types of activity

H: Ok let’s move on to qualifications.  Question I guess for both of you Nick and Danny – are the FSA setting the hurdle too high to demand that we have QCF4 as a minimum requirement to be able to give financial advice?

N: I don’t think they are quite frankly.  And I know there’s resistance to this, and probably what I’m going to say isn’t particularly popular but we’ve had a very, very long time to raise the qualification standards within the intermediary community. There’s a lot of people saying we’ve only got three years until we get to the end of 2012 but the reality is we’ve had since 1995 to do this.  And you know we had the benchmark of financial planning certificate in ’95 and I just think it was wrong for anybody to think that wasn’t an incremental process and that you needed to be studying and achieving these higher levels of qualification, but the debate at the moment is this trade-off between experience and qualification and I think that’s a debate that’s quite wasteful of our energy.  It is about the combination of relevant qualifications and relevant experience that I think the consumer deserves to know that their advisor has got that combination, so I would have thought that QCA level 4 was just yet another stepping stone towards some higher level of qualification in the future

D: I would certainly agree with that.  I think especially in the very early stages of the RDR formulation, probably the most powerful lobbying group in the whole process were the consumer groups, and they were nearly all arguing for QCF level 6, a straight jump to QCF level 6, and actually I think QCF level 4 is very much a compromise that raises the standards, and I would expect – and I don’t’ know – but I would expect that at some point in the future the bar will be raised again

N: Yes

H: When does the requirement for QCF Level 4 then come into effect?

D: If – well if you’re not advising in the industry today and you want to start next year, you’ll have to have QCF level 4 to start next year.  If you’re already advising in the industry you have a transition period till the end of 2012, so if you want to start advising on the 1st or 2nd of January 2013, you’ll need to have the new industry level qualification

H: And what do the various levels equate to?

D: QCF level 3 is where we are today, that is generally in academic terms an A level.  QCF level 4 would be a first year degree, and then level 6 is degree level

H: And what about comparing to something like a solicitor or an accountant – I mean –

D: Level 6 all the way

H: Level 6 all the way?

D: Yes if you want to be an apprentice accountant you need to have QCF level 4

H: Ok.  The impact of RDR, how does RDR affect the way I should run my business, going forward?  If I want to set-up and go forward, I mean is it going to be a big hamper on my lifestyle?  On my life, on my work, on my career?

N: It shouldn’t be.  I think as we’re saying here there’s this period of time during which we can transition a business away from the – if you like – I hate using the expressions – but the old model to the new model, and it’s a combination of things but they are items that are outside I think of the scope of what we’ve been speaking about now, which is it’s not just qualifications in the way you charge. I think it’s about the proposition that you bring to market, just what it is you’re delivering to the client, you know how you’re delivering that to the client.  I think the biggest challenge is probably – either ones in addition to qualifications and fees, and they are about, you know becoming a very viable business

H: And Nick, how has your business model changed ahead of RDR?

N: Well since 2004 we have changed away from being an intermediary business – it was basically being paid once a product was being put in place, to one that’s delivering financial planning in advisory services.  For us it was a 5 year journey but I think those starting to do it now, probably will be able to do it quicker, much quicker than we were able to achieve it, because I think there will be lots of support mechanisms in place to do that, but this is about changing the way in which we perceive the relationship with the consumer

H: So you’re likely to make more changes in the future then?

N: I think we’re already looking beyond 2012 and saying what does good look like, you know after the RDR has been implemented

H: Ok

N: No business model is going to be able to survive forever, I think we have to be able to embrace change and you know bring that back as a benefit to the client

H: That’s pretty general across all industries

N: That’s true isn’t it

H: Well thanks for your questions.  Coming in thick and fast to us this afternoon, to our two guests.  Let’s get on with the questions then gents.  “My company is and has been in receipt of renewal commission for over 20 years.” This is from Jerry.  “How will this commission be treated post-RDR?”

D: I think if we look at what the FSA have proposed in the consultation paper, they’re saying that IFA businesses, or advisory businesses will not be required to go back and prove that they’re earning that trail.  So you might want to consider it as ring-fenced. They’re not going to have to re-justify it, it won’t get just turned off or anything like that, so that’s there.  Where it starts to get a little bit interesting is where with some of those customers, that dis-advisor will have ongoing relationships with them and they’ll need to move that relationship onto an advisor charging basis, and then they’ll be questions around should I take into account the trail of commission on earning from past policies I’ve sold that client, as offset against their future fees, and that will be down to each business to decide.  I’m sure the FSA will have TCF concerns and apply that stick to it

N: I’ve seen nothing that suggests that that would end. What I would say and I think Jerry maybe wants to take a look at the agreements that he has in place with all of those clients, because I think one of the positive virtues of this change will be the – again the way we engage with those clients.  So having a proper service agreement in place with those policy holders will make real sense

H: Alright.  Got a message through from Paul from Money Marketing.  He’s got a question for you both.  “How much do the panellists believe the RDR should read across into protection and group pensions?”

D: OK I think from Legal & General’s perspective we strongly believe – well the key element of the RDR, the advisor charging, should not be read across into protection.  The market failings that the FSA identified for the pensions and savings market just have not been identified in protection, and I think it doesn’t take a rocket scientist to realise if you were to read it across into protection it would absolutely devastate that market and probably push it -

H: It would be bad news?

N: Yes I think it would.  I think – again I’m going to agree with Danny there.  I think read across the group personal pension makes sense, that was the thrust of the whole Retail Distribution Review argument, but not read across to protection because I think that’s just so open, you know the consumer can see the price they’re paying for the product, they know whether or not the cover they’ve got is adequate, and they can see the reward that’s being paid over to the intermediary for its recommendation

H: Ok final question, apologies if we haven’t got through all the questions that you’ve been putting through but time is against us, but final one here from Sean.  “How would you see the relationship between an IFA and an insurer such as L&G changing as a result of the RDR?”

D: It could change quite fundamentally, depending on the relationship to-date, because they’re not all in exactly the same place.  But today, as an insurer who pays commission on a traditional model, we’re actually involved in the advice side of the business purely because we fund it through our products. Going forward the advisory side of the industry will be generating its own revenues based on the value that it adds to the client, so we will be effectively removed from that part of the process.  And that fundamentally just changed the way that the two sides interact.  It will be much more of a supplier and customer relationship as opposed to – sometimes these business relationships are quite integrated, I think we’re going to see that start to separate

H: So just to sum up then Nick – interesting times ahead for us?

N: I think they’ve – well in all the time I’ve been in the financial services sector they’ve been interesting, this is just a new raft of interesting things to consider.  I think what I would say is – to my peers out there is just be prepared to just embrace change, you know don’t be frightened of it, embrace it, and try to work out what looks good for you because that’s what matters and what looks good between the intermediary and the customer in the future.  I think the relationship between the product providers and the intermediaries will continue to be symbiotic, it will just be a different relationship

H: Ok  Nick Bamford and also Danny Wynn, thanks for joining us on the program today.  If you’d like more information all you have to do is go to legalandgeneral.com/advisercentre and click on the RDR link.  That website address once again is legalandgeneral.com/adviser centre, click on the RDR link.  From all of us here, thanks for joining us, goodbye