The point of the Retail Distribution Review was to demystify the costs of investment advice to consumers. It failed in that and has created new, possibly bigger, problems too, says Gina Miller
Clear as Mud
The point of the Retail Distribution Review was to demystify the costs of investment advice to consumers. It failed in that — and has created new, possibly bigger, problems too, says Gina Miller
TRANSPARENCY AND ETHICS in the investment industry are causes dear to my heart — so much so that in January 2012 SCM Private launched the True and Fair Campaign to fight for a better deal for consumers and to demand total disclosure on all investment and pension-fund costs and holdings.
On this basis you might think I should welcome the Retail Distribution Review with open arms, as it provides a statutory requirement to disclose all fees and costs associated with investments and wealth management. No more hidden costs, they say.
This couldn’t be further from the truth. While moves to improve transparency on costs and fees are welcome, a fudged solution that creates more problems than it addresses is not. RDR does not give 100 per cent disclosure on all costs and fees and could inadvertently be the bullet that kills mainstream financial advice in the UK.
RDR does nothing to reveal all underlying fund-management costs and fees and in the current economic environment acts as a disincentive for even wealthy investors to seek, and pay for, good-quality independent advice.
Rather than celebrating RDR as a step forward for transparency, I regard it with growing alarm as the advice gap continues to widen and swallow up both small and higher-net-worth investors.
For wealthier investors who believe RDR doesn’t apply to them, the new rules contain as many unpleasant surprises as they do for mass-market investors. Wealthy investors may be under the impression that RDR will drive down costs and put competitive pressure on investment managers to reveal the trail commission they pay, and for advisers and wealth managers to offer a genuinely independent service to give tailored investment advice, but this is not the case at all.
What RDR has ensured is that it is no longer economical for independent financial advisers to take on any but the largest and wealthiest of clients. The FSA’s own figures show a looming advice gap. Studies from the regulator have found that 62 per cent of advisers ‘hope’ to retain clients with £20,000-£75,000 of savings and just 37 per cent of advisers say they’ll advise clients with less than £20,000 in savings.
While this may be the official line on the advice gap created by RDR, the reality from the frontline is that IFAs are turning away far wealthier clients than this.
Anecdotally we know that many independent advisers won’t take anyone with less than £250,000 to invest, moving the advice gap into high-net-worth territory. Someone with several millions invested in funds and pensions could find themselves struggling to get the advice they need if they’re looking to make a new investment of up to £250,000 but wish to retain their legacy funds in existing investments.
HOWEVER, IT IS not just RDR’s impact on advice that worries me; it’s also the effect on innovation. While I have often been portrayed as being anti-fund fees, actually I’m not. I’m anti-opaque, rip-off fund fees that levy a flat rate regardless of performance, especially in this low return environment.
To put this in context, the average UK equity all share unit trust total expense ratio is approximately 1.2 per cent on a ‘clean share class’ basis. Then you need to add on (undisclosed) dealing costs, spreads and tax, which bring total cost of ownership to significantly more than 2 per cent a year and higher for less liquid markets.
If these funds are part of a portfolio managed by a discretionary fund manager, there could be up to another 1 per cent a year in portfolio management fees. Advisers will also charge up to 1 per cent, meaning the total cost to the investor could be up to 4 per cent a year.
The net effect is that the client takes all the risk and then hands across more than 100 per cent of the expected return to pay fees to a series of well-meaning professionals. Clearly this is unsustainable and will force all parts of the chain to assess exactly how they are providing value for money. The squeeze on fees has only just begun.
I have no issue with high-performing fund managers charging a premium for excellent service if they can justify it. My issue is that costs should be totally transparent and disclosed up front to investors via a single figure. Only by doing so can performance between funds be meaningfully measured and investors make an informed decision.
I believe RDR is a regulatory salve for a problem that didn’t really exist. The anti-consumer practice of hidden costs and fees didn’t begin and end with IFAs and trail commission, and RDR has done nothing to advance transparency or champion greater consumer protection.
The scandal of hidden costs and fees continues. And thanks to RDR, many more savers, including wealthier investors, will find themselves having to navigate these murky waters without independent advice.