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Beware RDR’s unintended consequences*
Are we heading for a wholesale exodus of independent and experienced financial advisers, asks ROSS BOTTOMLEY of Campbell Dallas Financial Services (CDFS).
One of the main problems facing the world of the professional is a view held by regulators that rules will solve all the problems of the financial world. The difficulty with rules is that they tend to proscribe and leave the way open for the law of unintended consequences.
Among IFAs, the implementation of the Financial Services Authority’s Retail Distribution Review (RDR) is leading to a great deal of uncertainty. Speculation is rife and prophets of doom suggest wholesale detrimental consequences for the financial services industry.
RDR is designed to provide for three things: transparency of charges for consumers of financial advice, higher levels of qualifications for IFAs and specified financial requirements for businesses providing these services to the public.
On charges, the RDR endeavours to move the industry towards fee-based remuneration to combat criticisms of remuneration practices based on a percentage of the value of the investment products sold.
On IFA qualification, the hurdle has been altered to such a degree that the vast majority of qualified IFAs will require to re-qualify. The wealth of practical experience that many IFAs have is being discounted as almost worthless. This will probably mean that young, recently graduated entrants will be qualified almost immediately, whereas time-served, experienced practitioners will be faced with re-examination.
On financial security, adviser companies will be required to meet a much higher level of solvency (three months’ fixed expenditure), greatly beyond that applied to most other professions. This will make it easier for a sole trader IFA to qualify, but harder for medium-sized companies to. Conversely, the individual IFA will have difficulty meeting the qualification and compliance requirements overlaying this whole system.
I agree wholeheartedly with the sentiment behind the changes but I’m seriously concerned that the consequences will be totally contrary to the intention. In my view, the result will be:
• an exodus of highly experienced older IFAs from the profession. Indeed, the FSA itself admits there could be an exodus equivalent to 20% of the IFA population. Like a good fisherman friend asks: Who would you want in charge of your ship in a storm – a weather-beaten old captain or a new recruit qualified with honours from navigation school? I know my preference.
• a large number of medium-sized IFA practices will disappear leading to a greater predominance in the industry of tied and multi-tied organisations and a huge diminution in independent advice.
• clients will be driven towards banks and other larger organisations which tend to deliver a less personal service – indeed the smaller client seeking independent advice will find it difficult to find an IFA without having to pay disproportionately higher fees.
In some ways, this is almost laughable. Joint stock banks, for example, will not be subject to the same rules of financial adequacy as that applying to the IFA sector generally – they’re considered to be of such financial strength that this is not deemed necessary.
There is little doubt that change is needed. Nevertheless, with research indicating that as many as a fifth of IFA’s could leave the industry, I believe that a more considered and balanced approach to RDR is necessary. The truth is that, in these turbulent times, the need for more clients to obtain independent advice from experienced professionals has never been greater.
With research indicating that as many as a fifth of IFAs could leave the industry, a more considered and balanced approach to RDR is necessary.”
* Sponsored editorial
CDFS is a trading style of Campbell Dallas Financial Services Limited who are authorised and regulated by the Financial Services Authority. Company registered in Scotland No. 190523. For more information or advice please contact Ross Bottomley on 0141 942 6060 or email email@example.com. www.cdfs.co.uk
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