Dawn of a new decade for platforms?

Hugo Thorman, managing director of Ascentric, examines the issue of disclosing costs post-RDR.

The past decade, and past few years in particular, have seen dramatic change in retail financial services in the UK. The next 10 years are likely to see both an extension of some of those changes, but also, as ever, some new, and by definition unexpected, ‘discontinuities’. Both will have an impact on organisations, customers and employees.

The recently published FSA Papers, PS10/6 on RDR and DP10/2 on platforms especially, have reconfirmed the direction the industry will have to take. There remain detractors, but their arguments are sounding increasingly hollow as it becomes clearer that proposed business models are both workable and beneficial for investors and industry over the long term.

The cost of our industry

For our industry to be ‘useful’ and efficient, and even to justify its very existence, the RIY over say, 10 years, should be less than the expected and realised return above that on cash less an agreed premium for risk. Otherwise, it is reasonable to argue that clients should be left in cash.

I know there are those who will say that through a ‘financial plan’ sufficient value is generated for the client that any positive financial return over cash should be seen as a bonus. That may be a view, but the client must, in any case, understand the potential outcome and what he or she is receiving  – and not receiving – in return for the fee charged or commission deducted.

That apart, the role of the industry is to minimise this friction cost (or RIY), thus delivering both efficient, long-term savings to individuals and lowest-cost funding to (primarily UK) businesses. Ideally, it should be possible for advisers to show to their clients a competitive RIY that reflects the value added by each component and provider and the expected return to risk premium over cash equivalents. This argument does, of course, allow for higher RIYs in any part of the value chain where there is evidence of additional value that the client has accepted.

RDR impact

The FSA papers PS10/6 on RDR and DP10/2 on platforms and TCF reflect clearly what the regulator is trying to achieve. For some advisers the qualifications will prove too much, and that therefore there will be fewer advisers and fewer people ‘advised’ face to face. However, this will be mitigated somewhat by greater opportunities for workplace and remote advice.

Some in the industry have associated regulation with additional cost and a reduced opportunity to make a reasonable profit. This is misplaced. It is helpful for the industry to view the policy of the regulator to encourage, even ensure, that the interests of advisers, product providers and clients are all convergent. This has not been the case traditionally. In fact, they have too often, all tended to be divergent. Once an environment has been created that brings about a convergence of interests and, more important, a more equal balance of power, all participants should realise value.

Of course, there is of course a ‘transition cost’ to moving to a new environment. The costs of training and changing business model that will fully accommodate RDIP and TCF are substantive (for both advisers and providers) and in cash flow terms may be life-threatening to some adviser firms. That cost is now an inevitability.

Level playing field

The result of RDR on the industry will be to encourage a level playing field across investment vehicles and tax wrappers, more client choice and, ultimately, lower costs reflected by the RIY of client portfolios. A key part of this is disclosure.

There are those who feel that the component parts of the service to an investment client do not need to be disclosed. I believe there are two important reasons why this is just wrong. First, the separation of each component prevents cross subsidies such as through the
‘bundling’ of services. Second, the retail financial services market is different from the consumer goods markets. Cost pressure is not applied effectively to the services being provided, because clients feel that they must accept the package offered by the adviser rather than challenge it and each component. Disclosure of the RIY will lead to increased pressure and competition.

In the short term there is concern that RIYs are actually increasing due to the move to the ‘new model’. The job of our industry should be to lower this cost through efficient administration and competitive selection processes so that higher levels of consistent real, long-term value is generated for clients (savers and investors) and ‘UK plc’.