In case you didn’t know, the world of financial services is going through a major change over the next few years as the Retail Distribution Review (RDR) does away with commissions and imposes higher educational standards on advisers. For many IFA’s, the RDR represents yet another bureaucratic headache getting in the way of the everyday business of helping their clients. However, here are three reasons why even the most stubborn IFA should welcome the enforced changes to adviser knowledge and commission.
The growth of Financial DIY
Compeer’s March 2009 Financial DIY report suggests that for those resistant to change, the RDR is a blessing in disguise.
Some of Compeer’s findings include:
- 29% of adults believe their knowledge is as good as financial advisers’ – uniformly spread across age and socio-economic groups
- 28% of adults believe advice is just disguised sales of investment products – A&Bs (39%) and 40-49 year olds (34%).
- 26% of adults believe financial advisors add insufficient value to justify their fees (A&Bs 38%)
It’s about time therefore that IFA’s upped their game for their own sake.
They also found that:
- Overall use of IFAs fell in 2008 – 7% fewer respondents regard a commission based IFA as their main financial advisor compared to 12 months earlier.
- 6% of adults cite a fee based IFA as their main financial advisor, up 33% on the previous year.
- A growing proportion of people (67%) taking professional advice now seem to have accepted a fee based model.
And when you take into account the trend from 2003 onwards the picture doesn’t get any better:
- 44% of adults view the internet as an essential source of financial information and advice.
- 42% of A&Bs unadvised in 2008 (26% in 2003) and 44% of C1s (27% in 2003).
- Of those with over £1m of liquid assets, 61% make all or most of their investment decisions with professional advice.
The growth of financial DIY is powerful. Nails are already being hammered into the coffin of the traditional IFA.
Life insurers are going bust
There’s the other small issue that life insurers are going bust. Life insurers often report rosey results on a European Embedded Value basis to satisfy the markets. However, these results include future premium income on policies sold but not yet collected. With less than half of policies in force after five years, the International Financial Reporting Standards measure which does not include future income but includes investment losses have been showing unsustainable losses for some time. Up front commissions funded by the illusion of long term contracts are therefore unsustainable.
The loss of indemnified commissions under the RDR is therefore insignificant. They were already on the way out.
Bear markets badly expose the transactional, commission based adviser
Traditional commission based advisers often sell themselves on their ability to pick funds, find the best product – little more than a personal shopper in some ways. When the focus is on the transaction rather than the long term plan, the indemnified commission based adviser’s credibility and business model tends to sink as fast as their client’s funds. By focusing on working with clients on their plans and charging explicitly for the life enhancing work, advisers’ business models are far more sustainable.
Be thankful for the RDR. For the transactional IFA, it is a wake up call. For those financial planners already prepared, the industry is better for it.