Sunday 19 January 2020

Financial advisers face extinction as ban on commission-based sales comes into force

Chris Vellacott

FINANCIAL advisers who for decades have prospered from selling investments to Britain's middle classes are braced for a looming ban on commission-based sales set to shake up the industry and drive some out of business.

Industry experts said Britain's Retail Distribution Review (RDR), which comes into force on January 1, would result in fewer, larger mutual funds and more do-it-yourself investment portfolios as consumers cut out middlemen and buy direct. It affects many British companies as well as Irish companies, such as Dublin-listed IFG, which sells financial services in the UK.

The package of reforms is heralded as the most far reaching shake-up of Britain's investment industry for decades.

Its main thrust is to do away with selling products such as mutual fund investments for commissions, and replace it with a system of fees.

Regulators argue this, and higher barriers to entry to the profession such as more rigorous qualifications, will help ensure that investors are offered what matches their needs rather than what pays the salesman the best commission.

"We've had complete misalignment of incentives between advisers who should be working in the interests of the customers but are paid by a product provider," said David Geale, head of the investments policy department at Britain's Financial Services Authority (FSA).

"We'd reached a place where consumers had lost confidence and trust in the financial services market," he said.

According to the FSA, fund management firms typically paid out between 1pc and 8pc of a client's money to the adviser who made the sale, or up to €800 from a €10,000 investment.


As the date for implementation looms, some are warning private investors will baulk at paying an upfront fee.

The risk is that consumers will shun financial advice altogether, potentially putting their savings into something inappropriate that they would have been advised against by a professional.

Research published this month by consultancy Deloitte warned that 5.5 million people could become "financial advice orphans", unable or unwilling to pay for advice. Up to a third of customers, particularly the less wealthy, could start designing their own investment portfolios.

This, says the FSA's Geale, is not necessarily a bad thing.

"If some customers look and say, 'now I know the cost of this advice and the effect it will have on me, I don't want to take advice I'd rather do it myself', that may not be the wrong answer," he said.

"If the information available to people enables them to make that decision themselves, I'm not seeing that as a bad thing."

Meanwhile, many retail investors are already finding there are fewer options to choose from when seeking financial advice. The extra regulatory burden and the need to pass examinations for the new regime has pushed many small independent financial advisers to shut up shop or sell out to larger rivals.

A survey of financial advisers published by Allianz Global Investors last month found 60pc of them said it will not be profitable to deal with clients who have less than £50,000 in liquid assets when RDR is introduced.

Britain's retail banks, including Barclays and Lloyds, have wound down their provision of financial advice to mass market clients. Consolidation, as unprofitable financial advisers are bought by larger rivals and retail banks turn their backs on the mass market, is leading to warnings that consumers could end up paying more for financial services.

Britain's population is ageing and baby boomers are reaching retirement age, the point in their lives at which they are most likely to need advice on how to manage their pension pots and other investments, critics argue.

"There are more people going to want to seek advice but actually there's going to be less supply. If supply is low, and demand is high, you can actually charge more for it," said Ed Dymott, head of business development at Fidelity Worldwide Investment.

Product providers, the fund management firms, could consolidate too, some analysts say, as relying on healthy inflows of retail money by paying hefty commissions to salesmen will no longer work. (Reuters)

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