Not so long ago, the love affair between providers of regulated products and IFAs looked as deep and long-lasting as ever.Â But when you start falling a bit out of love, you quickly fall a lot out of love.Â And while providers and advisers may still look like the perfect couple to the outside world, I wonder more than a little about what’s actually going on between them behind closed doors.
What’s changed?Â Well, as so often in tales of fading love, a third party has come between them.Â In this case, of course, it’s the FSA and its Retail Distribution Review.Â In launching this initiative – and, most of all, in sounding the death-knell for provider-determined remuneration – I don’t think the regulator intended to drive a wedge between providers and advisers:Â the aim wasÂ only to drive them towards behaving in a more civilised manner towards the public.Â But the FSA seems to be able to do very little without triggering off an avalanche of unintended consequences, and RDR is no exception.
The trouble is, RDR has got both parties thinking.Â Advisers have started thinking rather unsentimentally that if life and investment companies aren’t going to be able to go on rewarding them so richly for their continuing devotion with large lumps of initial commission, there really isn’t any very compelling reason to put up with them any longer.Â Nine times out of ten, there’s a perfectly viable alternative – usually a tax wrapper provided by a platform, stuffed with ETFs or virtually-no-charge index funds as an investment solution.Â And actually, since putting that together looks cleverer and more complicated than buying an insurance company’s pre-packaged product, it may even be that under Adviser Charging, an IFA can actually justify a higher fee to his client.
Meanwhile, Â providers have started thinking much more anxiously that without access to the control mechanism of commission, their ability to get the outcomes they want from advisers will become similar to the ability of an airline pilot to get the outcome he wants from his plane without access to a joystick.Â Yes, you can design and promote sexy new products;Â yes, you can build strong relationships;Â yes, maybe, you can even do something about your diabolical service standards.Â But unless you can offer products which either permanently (eg investment bonds) or temporarily (eg any product on price promotion) offer advisers more dosh than the alternatives, how can you actually be sure they’ll come through with the sales volumes you’re looking for?
It’s this prospect of a loss of control (or, to put it another way, the prospect of a world in which advisers actually choose products because they’re good, rather than because they pay more) which frightens providers so badly.Â Â It’ll be very interesting to see, for example, how many investment advisers carry on recommending high-cost, poorly-performing actively managed funds over ETFs and index funds when they have no financial incentive to do so:Â if I was running a firm making most of its money out of charging 3% up front and 1.5% per annum for the services of active fund managers delivering consistently below-average performance, I’d be pretty anxious too.
While advisers, therefore, consider the extraordinary possibility of doing a better job for their clients, providers look for target markets too ignorant to resist overcharging.Â A few firms have found some excellent options overseas:Â I speak from profound ignorance and I vigorously apologise if I’m wrong about this, but I’m told that Prudential, to name but one, is able to maintain margins on sales in the developing world at a level we haven’t seenÂ in this countryÂ for 30 years or more.Â But these days, the large majority of firms are looking much closer to home:Â the Internet offers lovely low-cost access to millions and millions of consumers who have no idea that 2% p.a. is an absurd amount to pay for any fund manager who isn’t Anthony Bolton or Neil Woodford.
This is good for me, I suppose, provided I don’t lose too much sleep over the value for money question.Â Â Among our clients and prospects, the balance between those focusing on intermediated and on direct channels has changed dramaticallyÂ over the course of the year.Â Â Is it good for consumers?Â Not sure.Â The FSA is certainly right that on the whole – with many admirable exceptions -Â the broad mass of consumers have been horribly badly served by theÂ outgoing tied and independent advice regime of the last 20-odd years.Â I wish I felt that on the whole – leaving aside more affluent people who IÂ hope and probably believeÂ will be better served by post-RDR advisers – the broad mass will be better served by the incoming provider-owned distribution regime.