Front and centre of RDR are three core aims: improving the clarity of investment management services to consumers; increasing professional standards of investment advisers; and addressing the potential for adviser remuneration to distort service. All three are entirely justified. As ever, the devil is in the detail.
Let us not forget what private investors want. Almost all are looking to achieve steady growth in the value of their savings, protection against the corrosive effect of inflation and consistent returns. They want to know that they will always be able to drive a nice car and are not at risk of moving from a Ferrari this year, to a moped next.
The private client investment industry is a fragmented one, with a number of business models. The issue that the Financial Services Authority (FSA) faces as it implements RDR is that a “one size fits all” approach may not work. Those businesses where revenue comes from front end charges and trail commission, particularly those that are relatively small, will find implementing RDR extremely challenging. There is already evidence of consolidation within IFAs.
Wealth managers that emerged from stockbroking firms many of whom are represented by APCIMS (the Association of Private Client Investment Managers) are likely to see less of an impact, but as Ian Cornwall, APCIMS director of regulation, recently stated, “the data source has been based upon IFA business models”. APCIMS is lobbying the FSA to properly understand the distinct character of wealth management businesses and ensure that the costs associated with RDR do not outweigh the benefits.
The hijacking of “independent” by RDR is just one example of clarification in terminology which is currently understood by investors. In short, is an adviser tied to specific products or truly independent? RDR seems to redefine independence, with only those firms that are able to give advice on all aspects of client finances defining themselves as such.
Transparency on costs is a key part of RDR and something to be applauded. Along with tax planning and good investment performance, these are the three most important factors that determine long term success. With transparency comes the impact of market forces, which must be to the advantage of consumers. The only potential issue that will need to be monitored is an unwillingness by investors to pay for advice. Consumers are far more price sensitive when they have to write a cheque for a product or service than when it is embedded in the overall price. Whether this is rational or not is not the point. The problem will come if investors shy away from taking advice because of the cost and end up making bad decisions.
Finally, ensuring that all financial service practitioners are properly qualified is once again entirely sensible. What the IFA sector is, however, seeing is that advisers with 20-30 years experience are understandably upset to be deemed not competent unless they “gap fill” by taking exams. A number have decided to sell their businesses and retire instead. It is rather similar to what is happening to healthcare in the USA. It is estimated that 20 per cent of the workforce will retire in the next 5-15 years because of the “boomer” effect. An aging population will need more medical care, but doctors are retiring just when they are needed, because their job has become too tiring, too litigious, and too regulated. RDR might to do the same to financial services if we are not careful.
RDR aims to ensure that private investors receive good advice at the right price. Whether we are regulators or investment advisers, we all need to be certain that collateral damage is kept to a minimum. Sensible regulation is a good thing, but it does not create good investment returns.
David Miller is a Partner at Cheviot Asset Management, one of the largest independently owned investment firms whose assets have doubled to £3.5bn since the credit crunch began in 2007.