The Retail Distribution Review (RDR). Harris Interactive's viewpoint


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This edition focuses on the need for regulation, the changes coming into force and the implications and challenges being faced by the industry.

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The Retail Distribution Review (RDR). Harris Interactive's viewpoint

  1. 1. Keeping you connected to today’s UK financial services market Welcome to the third edition of viewpoint, Harris Interactive’s UK financial services newsletter. In this edition we take a look at the Retail Distribution Review focusing on the need for regulation, the changes coming into force and the implications and challenges being faced by the industry. We hope you find this newsletter informative and useful. If you wish to find out more about the work we do within the financial services industry please get in touch. Frances Green: Financial Services Director Peter Shreeve: Senior Consultant Financial Services Research In 2006 the FSA announced it was to review how financial advice is sought and paid for - since then it has become somewhat of a ‘hot topic’ within the industry. The need for regulation Historically, when focusing on investments and advice, some within the industry have treated customers quite poorly. Consumers have suffered from the mis-selling of personal pensions, endowment mortgages, high income bonds as well as the collapse of both Equitable Life and Barings Bank amongst others. With little or no protection from the government, consumers have been left to their own devices and have had to pick themselves up, dust themselves down and start again. We cannot therefore be surprised that when consumers seek professional advice today, they have a number of concerns that primarily focus on the safety and security of their investments, adviser self interest (commission levels) as well as the return they can expect to receive. Retail Distribution Review (RDR) For more information on our financial services research practice visit:| PAGE 1 ISSUE 3 - October 2010 viewpoint The RDR & the need for regulation Pages 1-2 Safety and security of investment No concerns Advice, adviser to be independent Knowledge, qualifications of adviser Being advised correctly (best correct, right advice) State of economy / financial institutions Honesty, trustworthiness of advisers Interest rate Return on investment Advice / product tailored to meet needs Adviser self interest (commission payments) 17 4 5 5 5 7 7 8 10 10 20 15 2 1 7 1 2 16 7 3 10 17 Bank, Building Society User IFA User % of respondents 403020100 Source: Harris Poll Omnibus, August 2010, Main source of advice (IFA – 235, Bank or Building society -288) Challenges ahead & join our RDR Syndicate Page 5 Q. When seeking professional advice for savings, investments and pension products what concerns, if any, do you/would you have? Continued on page 2... Separation of advice charges Page 3 Changes coming into force Page 2 Improving standards of advisers and services Page 4
  2. 2. Issue 3 | October 2010 For more information on our financial services research practice visit: | PAGE 2 viewpoint How much do you trust the advice given by... Some Alot A great deal Doctors (GPs) Nurses Solicitors Chartered Accountants Tradesman (e.g.mechanic, electrician) IFAs Bank/building society advisers Estate agents Source: Harris Poll Omnibus, August 2010, All respondents n=1980 % of respondents 25 88 902738 26 44 18 35 27 291226 5521241 5641438 5721045 6061638 708 100806040200 Consumer concerns have been perpetuated by the sector’s previous ‘indiscretions’ which have eroded consumer trust and confidence within the sector. Given recent history and the range of concerns held, it is not surprising that only 56% of the UK population have some trust in the advice given by IFAs, bringing them above only bank/building society advisers and estate agents. Currently, financial advice is generally paid for on a commission basis. Additionally, fees and product charges have a tendency to be bundled together and lack transparency. Hence, consumers are unlikely to know what they are paying, nor attach any intrinsic value to the advice they are given. Concerns were also raised regarding the impartiality of financial advisers when recommending products. It is clear something had to be done to restore faith in the advice being received and the industry as a whole. Continued from page 1... Changes coming into force The 2006 FSA review highlighted a number of issues that impact on the perceived quality of advice and upon actual purchase outcomes, which they feel has led to falling levels of trust and confidence within the UK investment market. There was a perception that some advisers may be biased towards products or providers that offered higher levels of commission. Consequently, consumers were being sold products which may not fully meet their needs. The review has led the FSA to make regulatory changes to address the ‘root cause’ of these problems and to re-enforce and build upon their notion of treating customers fairly to restore trust. Coming into effect at the end of 2012, these changes will impact all regulated organisations involved in producing or distributing retail investment products and services, from banks to building societies, insurers to wealth managers and financial advisers. However, re-building trust in the investment market is not an easy feat, considering the general negativity the financial services industry as a whole has experienced over the past 18 months. Whilst the benefits and end goal from the reforms is clear, there is a mountain to climb in terms of both awareness and education amongst consumers. A number of studies conducted by Harris Interactive have shown a lack of awareness amongst even the most sophisticated of investors regarding how much they currently pay for advice and a total lack of understanding of the different parties involved and their role. Improving the clarity with which advisers describe their services Separation of product and prefessional advice charges Improving professional standards of advisers
  3. 3. Issue 3 | October 2010 For more information on our financial services research practice visit: | PAGE 3 Separation of product and professional advice charges To tackle head on the perception that the commission based structure has led to biased and inappropriate advice, the FSA propose removing commission and replacing this with a charging structure of up-front fees. At first glance this does appear to be a major step forward, providing greater transparency with a fairer model whilst helping to instil greater levels of trust and confidence in the advice being given and the wider industry. However, proposing to disclose actual adviser fees upfront will require a major shift in the mind-set of the consumer, as well as exposing them to a level of detail to which they are not accustomed. I am certainly looking forward to seeing the different approaches marketers use to address this challenge. A recent survey conducted by the ABI found that an existing full advisory service typically costs £670 and on average takes around 7 hours 40 minutes which includes all client meetings, research and preparing recommendations and post-sales administration. As a result of the current bundled charges approach, this cost for advice and associated time will exceed expectations for many. The same ABI report has also calculated that on average consumers with less than £257 per month to save or £13,730 to invest as a lump sum cannot be economically served by full advice. Therefore, if a much less time consuming advisory process can not be agreed, such as simplified advice, many consumers will either choose not to seek professional advice at all or be unable to afford to. This increases the risk of greater mis-selling due to the lack of access to advice, defeating one of the major aims of the RDR. Although in principle I support what the FSA are doing, I am concerned that financial advice may become a two-tiered system, one for those who can afford full ‘independent’ advice and one for those who cannot. High street bank CEO’s must be laughing all the way to their bank as the review plays straight into their hands. Money Made Clear, will be an invaluable source of help for many, providing free impartial financial advice for those who are aware of the service. However it will not go to the next stage and make a product recommendation leaving those most at need with nowhere to turn. A question I have to ask is, has anyone taken on board what consumers want? From our survey less than a third of those who seek professional advice when buying investment products prefer to pay an upfront fee. From focus groups I have witnessed, whilst many welcome the high level of transparency the RDR brings, some consumers have actually said they would prefer to remain ignorant of the system and carry on regardless. Obviously, that would not be treating them fairly but an alternative solution must be found that at the very least negates the need for fees to be paid upfront and does not punish them for doing so. How would you prefer to pay when seeking professional advice for investment products? Company I invest with pays adviser commission I would prefer to pay a separate flat fee directly to adviser Other I would prefer to pay an hourly fee directly to adviser Not sure Source: Harris Poll Omnibus, August 2010, Those who seek professional advice n=914 30 6 1914 31 viewpoint
  4. 4. Issue 3 | October 2010 For more information on our financial services research practice visit: | PAGE 4 Continued on page 5... Thinking about the different qualifications people take to perform their role, which of the following professions, if any, do you think are sufficiently qualified? Doctors (GPs) Nurses Solicitors Chartered accountants Tradesman ( mechanic, electrician) IFAs Bank/building society advisers Estate agents None of these 81 72 67 50 35 21 16 9 11 0 10080604020 % of respondents Source: Harris Poll Omnibus, August 2010, All respondents n=1980 Improving professional standards of advisers The introduction by the FSA of a new entry level adviser qualification as well as enhanced standards for professional development and an overarching code of ethics, will go a long way to improve current consumer perceptions. Looking at the results of our own survey, this is an area where the industry clearly needs to build greater levels of trust and confidence. Only 21% of the UK population perceive IFAs as sufficiently qualified to perform their role, falling some way below other professions. Driving up professional standards has also been welcomed by advisers. A recent survey conducted for the Chartered Insurance Institute and Personal Finance Society amongst a range of financial advisers found 61% agree that the RDR will lead to a more professional financial services market. From the same survey, a similar proportion also think better qualified advisers are able to deliver a higher quality level of advice. It is the interaction between consumers and financial advisers which provides an opportunity to help instil greater financial capability and discipline, supporting another FSA initiative. Improving the clarity with which advisers describe their services Tying in with the requirement for transparency, post 2012 financial advisers will also have to be clear on the type of advice they are providing by distinguishing between whether the advice is independent, restricted or tied. When asked, consumers always state they want the advice they receive to be independent, something which will put many financial institutions in a bit of a dilemma. What type of advice should we offer? Will consumers be willing to pay for it? Personally, I don’t think all consumers will either need or be willing to pay for ‘truly’ independent advice, as this will lead to higher adviser fees as a result of having to conduct more research. Though, at the very least all consumers will want to be able to see how the products they are being offered compare to the rest of the market. I do believe providing clarification around the type of advice on offer will further help to build trust as a result of this increased transparency, although all financial services marketers will have to be careful not to confuse and potentially alienate those who are unable to pay for a full advisory service. viewpoint
  5. 5. Issue 3 | October 2010 For further information related to this article, such as the background data, or to suggest new topics for inclusion please email or call +44 (0)161 615 2300 The FSA also need to ensure those advisers who offer an independent service are monitored in a way which is appropriate but not restrictive and ensures this is not treated as a mere ‘tick box’ exercise. The challenges ahead So, where does all this leave providers, financial advisers and more importantly, consumers? For advisers, being more transparent with regards to their charges could price many out of the market. The recent Chartered Insurance Institute and Personal Finance Society survey estimates approx. 10% of advisers will leave the market post RDR. For those who do stay, they will need to ensure they have gained their required qualification as well as be clear on their independent or restricted advisory stance. Obtaining independent advice may be a concern for consumers now, but who will be willing to pay for it in the future? IFAs are more likely to target the more affluent market presenting an opportunity for other financial institutions such as banks, which have the networks in place to be accessible to consumers. However their advice offering will need to be cost effective in order to combat both consumers’ affordability and reticence to pay. There is also a need to educate consumers around the process of how investment purchases work and I believe the responsibility not only lies in the hands of the FSA, but providers and IFAs as well. This can be done through the industry coming together and communicating with consumers to increase awareness and understanding of the changes and benefits the RDR brings. This would also provide a unique opportunity for the industry to promote itself and improve its reputation to help re-build trust in the investment market. This article was researched and written by Farzana Badar, Senior Research Manager, Financial Services Research Team. Continued from page 4... To share the latest thoughts and options of financial services team, visit our pages at: Here you will find recent case studies, visit our blog, post your comments, download recent reports, and access the archive of viewpoint newsletters. Join our RDR Investor Syndicate Harris Interactive invites you to participate in our new Investor Syndicate focusing on the Retail Distribution Review. The syndicate offers a cost-effective way of regularly monitoring investor awareness and attitudes towards the changes proposed by the RDR, likelihood to use advice when taking out investment products and with what level of advice. Our first wave is currently in field. For further details, contact: Frances Green: or Michael Worledge: viewpoint