David Ferguson: RDR isn't only about advice

Those of you with even a passing eye on the regulation of financial services will be more than aware of the major initiative currently under discussion and due to be implemented in 2012.

Actually this intro could apply to any one of three interventions that may change the face of the industry but this piece is not concerned with Solvency II or Personal Accounts, but rather with the Retail Distribution Review, the FSA's attempt to introduce more transparency and accountability into the advice process.

Now while I generally laud the RDR and believe it has become a catalyst for positive change in the sector, I think that perhaps too much attention has been placed on the advice 'bit' and insufficient eyes have been on the impact for product providers.

Not everyone is aware of this but a large proportion of the products that have been sold over the last 20 or 30 years have not only involved some questionable advice practices but often the underlying product design has been heavily influenced by 'kickbacks' and other dark arts of the product design folks.

In short the products that have been available have often been designed according to, or constrained by the range of investment choices available to the client. One very common scenario is that a fund management group would pay a commission to a life office to have its mutual funds available as a fund link on an insurance bond or a personal pension.

The life office would then market the product boasting of the coherence of the funds on offer and make no mention of the harsh reality that this fund range had perhaps been constructed entirely on the basis of the commissions being paid by asset managers rather than on the potential benefits for the customer. Quite how the regulator is not interested in this is beyond me, particularly as there now appears to be greater appetite to regulate underlying products rather than simply advice.

Shame on them you might say and you might think that as platforms have been such a positive force for change that they would be squeaky clean in this regard. While some of them are (Nucleus, Transact, Novia, Ascentric & Macquarie to name five), many are not and have themselves been offering clients a proposition that is limited according to the platform's own business model.

In my judgement the key question to ask of a platform (or a product provider) is how open is their open architecture? For all the talk of iPhones in the past few weeks the hideous reality is that many companies are really offering a souped-up Walkman rather than a truly modern alternative.

For example while most platforms will offer a wide range of unit trusts and Oeics, some will fail to offer a decent cash proposition or access to investment trusts or ETFs. Similarly they may also offer only a very narrow element of the index-tracking fund market. This means that investors will often pay more for sub-standard asset management (and be exposed to greater risks) simply to support the business model of the platform. Outrageous, huh?

Anyway, and back to the RDR, the good news is that this may be all about to change and platforms will be forced to disclose their underlying margins (and ultimately their motivations) as part of the regulatory change. It is going to be interesting to see how some of the Walkman-platforms embark on making themselves RDR-friendly and how much change in the underlying business model this might require. Given the tenuous profitability of some larger platforms and the requirement to completely re-engineer their business model I wonder how many will still be around to tell the tale in 2012.

As someone might say to an ageing rock star, just because you had a big past, doesn't mean you are set for a huge future.

David Ferguson is chief executive of Nucleus Financial