Will simplified advice be abandoned?

With the Mexican stand-off over regarding the release of the FSA’s consultancy paper on simplified advice, we now have the guidance in concrete that this distribution channel will not be a quick win for the industry in gaining the middle market post RDR implementation but a service operating under the ever growing close scrutiny of the regulator with all the risks attached.

Although we knew that simplified advice would always be included with the adviser charging, remuneration and recommendation rules (COBs 6.1A & 9.2.1R) and it would not be a basic advice channel working outside the RDR, the fact that authorise and validate is key and the regulators tendency to bayonet the wounded may see off any valiant attempt at pioneering a state of the art streamlined distribution channel. Indeed we are already seeing smaller outfits such as Churchouse Financial planning throw in the towel on simplified advice.

The main problems may lie in the fact that clients who may want to orphan themselves post RDR due to knowledge of remuneration levels paid or a savvy understanding of the changing market landscape, also NEST auto-enrolment schemes give clients all they perceive they need for pension planning, the Money Advice Service is viewed as a conduit to financial planning and the fact that 49% of the ‘mass market do not have the means to invest may result in simplified advice being abandoned.

Yet Life companies, banks and the larger IFAs and wealth managers may still want to explore cutting edge technology that brings financial advice to the door step of mass market clients. The problem with this is the design and implementation may result in hybrid model which doesn’t actually serve the very market simplified advice was targeted; the potential RDR disenfranchised investor.

If simplified advice is to work, what truly needs to happen is a ‘flip funnel’ approach where the service (particularly technology) is designed around the clients not the business needs, the regulators need to become more inclusive in a ‘co-build’ strategy allowing both the market and the regulator input into service design, and certainly higher professional qualifications need to be employed for any individual delivering simplified advice to ensure market professionalisation is carried forward.

Bold and expansive technology driven to the customers needs should have emphasis on simplification such as transparency and simple product with initiatives such as the Social Market Foundations product ‘Kite marking’ adding great value to understanding and knowledge of product features and benefits.

Indeed simplified advice also gives a marvellous opportunity for the industry to address the elephant in the room, that of behavioural economics and how clients’ irrational behaviour may once and for all be addressed by a standardised service for the very market that desperately needs financial planning.

Regulators nudge strategy applied with industry communication and soft skills geared to coaching clients down a path of self discovery can lead to real understanding of how irrational biases such as inertia, procrastination and mental accounting can be managed and financial capabilities improved.

Easier said then done? Well, in other industries we are seeing early signs of how regulators and the market can come together in the US healthcare system, with, for example, President Obama’s radical new regulation to make healthcare affordable on a mass-market basis. Although heavily subsidised, this continues to result in pushback from the industry itself, but with regulatory nudging Americans may finally be able to enjoy something similar to the marvellous UK NHS system that we often take for granted.

More time and getting heads around the key issues from all corners of the market is therefore needed to really assess the benefits of simplified advice.

Yet with independent, restricted, specialist, generic, execution only, basic and primary advice being toyed with by most market participants in some shape and form and the RDR final straight ever looming, we may see simplified advice being placed on the back burner, or indeed abandoned. I hope not.

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The FSA’s much awaited follow-up to CP10/29 for the role platforms play in financial services has today provided the industry with another indication for the move towards full facilitation of client inclusion and clarity in financial planning. There is no getting away from the fact that the product providers have had their day and now the RDR demands transparency and the industry must conform.

As ever there are a few issues to be mindful of. We need to ensure the rule book is understood. The Conduct of Business Sourcebook (COBS) needs to be lived and breathed by all market participants to get to grips with cutting edge strategies that will facilitate better client relationships and aid healthy engagement between industry and regulator.

Issues such as COBS 6.2.15R which focuses on adviser charging can lead some to think that if adviser firms were to remain ‘off platform’ then higher adviser charging is perfectly plausible and within the rules. It’s a grey area, as this platform paper is adamant that the reason for proposed cash rebate and product provider payments to platform bans should not interfere with the client and adviser relationship. At the end of the day the adviser charge has to be agreed with the client and with discerning clients comes the needs for advisers not only to remain competitive, but also to show value.

COBS 6.1E.1R is truly about transparency demanding full disclosure of fees/commissions from fund managers. Indeed COBS 6.1E.2G stipulates if a platform were to accept fees/commissions then obligations to notify the client under best interest principle 6 & 7 need to be adhered to negate any bias.

There are also the issues surrounding the independence ruling in that it is debatable if true independence status can be maintained if only one platform is used by an adviser firm for all or even the majority of their clients. This plus the fact that off platform investments must also be considered if ‘whole of market’ advice is given means (particularly where client segmentation is concerned) a one size fits all attitude and artificial investment spread are to be avoided. COBS 6.2A.4A & COBS 6.2A.4BG attacks independent firms who solely rely on rebates from funds on platforms.

Indeed platforms are defined as just that, platforms and not distributors. This definition is needed to ensure all market participants are under no illusions as to what the relationship should be when using a platform. This is a key area when considering supermarkets, as platforms must maintain impartiality on fund presentation, the paper therefore implies supermarkets may have had their day.

Where adviser charging (AC) is concerned, COBS 6.1B.9R ensures ‘platforms face the same requirements as product providers of they facilitate payment of advice charges’. The main aim is to ensure client inclusion for the decision to agree the amount of charging that applies. Where validation for clients instructions are concerned then COBS 2.4 is necessary to confirm the rules for reliance on others. The main concern we have is the issue concerning the cash accounts use for AC facilitation, definition on protection re ICAAP rules needs to be enhanced or at least mentioned to protect client money in event of liquidation for e.g.

COBS 6.1A.22R is all about ongoing services regarding AC and it is the advisers responsibility to ensure that fees are appropriately paid and for those clients who orphan themselves, then the advisers must stop the AC. engage’s Viability activity based costing software will aid clear fee monitoring and management to ensure advisers and their clients are accountable and all activity is validated in the necessary way.

So for some this paper may have been a damp squib with no ground-breaking revelations, but I think it’s another positive step in the direction for transparency within the industry, clarifying the need for caution for cost benefit analysis for rebate bans, definition for execution-only strategies as encompassed within the platform rulings, a penchant for unbundling and clarity for client communication via technology and indeed knowing how the COBS applies to not only Platforms but also to the RDR.

A quick summary:

 

 

 

Key issues

 

Comments

 1. Overview  1.     Payments by providers to platforms2.     Cash rebates to clients.  CP10/29wanted to enhanced transparency and disclosure on these payments but with no direct ban (see page 116). A ban was due though on cash rebates to clients.The position has changed to the extent that the FSA wish to ban both outright come Jan 1st 2013, but with work carried out by TISA and other industry bodies, the FSA will take further consultation with any ban starting no earlier than this date. NB the Aussie did a 180 degree turn around on allowing rebates in at the 11th hr in their regulatory ‘revolution’.
 2. Defining a platform and distributing products.  1.     CP10/29 defined platforms and service providers. Yet question marks remained over providers such as SIPPs/ISAs/CIS/AFMs & if Execution only applied to new definition.2.     Adviser Charging; to gain momentum on platforms, through cash a/cs.3.     Adviser firms use of platforms  1. PS11/9 defines ISAs that offer multi funds as platforms but Life co’s, SIPPs CIS, AFMs are not.i.e. those arrangements offered by private client investment managers that are adviser paid and ancillary are not incl.Execution-only is included to the extent that COBS 6.1E.1Rrequires disclosure to client of remuneration. i.e. best practice applies.2. Adviser Charging on platforms to follow product charging as per COBS 6.1B.9R i.e obtain and validate client instruction. Funding and servicing of client accounts need to be monitored and in clients best interests. (e.g. if client orphans themselves) BUTthere is no mention of escrow accounts or indeed ICAAP rulings! (Page 180).3. Independence standards need to be met when ensuring platforms are right for clients. i.e. no bias and restriction on platform recommendations. COBS 6.1E.1R=transparency of fee. Thus care needs to be taken with DFM/supermarkets that need not conform?Single platform use depends on the clients interests.
 3. Payments to platforms and consumers  1.     Product providers to platformsCP10/29 addresses potential conflict of interest here and recommend disclosure but no ban.2.     Cash rebates product providers to clients; Rebating seen as a style commission ‘throw back’  1.     Unbundling seems to be preferred in this paper with proposed ban on product provider payments in order to separate product and platform charges. The RDR objectives of consumer clarity of product charges therefore needs to be upheld. BUT before the ban maybe upheld, impact analysis needs to e completed.2.     Ban to go ahead. The objections to CP10/12 re cash rebating aiding fees, exactly the behaviour FSA want to cull. RDR rules stipulate that client, adviser and providers agree the cost of advice thus this may vary and rebates cannot cope with this and set by provider.
 4. Re-registration and capital adequacy.  1.     in-specie re-registration standards to be recommended to all nominee companies.2.     COBS 6.1G.1R re-drafted to reflect that not all firms maybe nominee based.3.     Re-registration to take place in reasonable time frame.4.     Share classes and bulk trfrs  The work conducted by TISA and the platform re-registration panel is to be commended and works well with the papers emphasis on ensured best practice and best advice for clients wanted independence of choice and transparency in comparison of available platforms features and benefits.Re the issue on share classes the ban on cash rebates does not mean a proliferation in share classes due to unit re-investment allowance. Re Bulk trfrs most platforms should facilitate re-registration, they’re big enough!
 5. Investing in authorised funds through nominees.  1.     Platform investors to have same access to funds as direct investors.2.     Key Investor Information KII a and associated costs of information for clients.  It is the general industry view the platforms have a rosy future and thus more business will be written and more funds available on platforms.Electronic fund information is to be encouraged with hyperlinks to repository of information on relevant fund information.Short reports as used in UCITS IV are to be recommended i.e. synthetic risk and reward indicator (SRRI) as part of KII. Short forms to be provided 1/4rly.Clients to be kept informed and engaged as is currently on voting rights i.e. CP10/29 proposals cancelled. BUT with key guidelines.
 6. Cost benefits analysis.  

  • Decrease in platform compliance costs from £174.6m to £103.8M (due to rebate ban)
  • One off cost £55.4m (platforms £40.4, £2.9 fund mgers, £12.1 intermediate fund holders).
  • Ongoing Costs £48.4m (£20.4 platforms, £28 intermediary fund holders –non for fund managers)
 What we need to watch out for and that is not factored in to the cost benefit analysis is the fact that advisers may increase their fees in accordance to the ‘missing rebates’.