The Treasury Committee has issued its report on the Retail Distribution Review. Disappointingly it has missed the elephant in the room. The bulk of investment products are now distributed directly or indirectly by IFAs through platforms. Nowhere in its report does the Committee address this issue which eloquently demonstrates that it has failed to grasp how the industry works. Instead it focuses its attention on the issues of an ageing and poorly informed industry that is a sales force masquerading as an advice network.While there are real issues about the quality of advice provided to the public the main problem the country faces is a lack of savings, not the wrong type of savings. In an environment where defined benefit pensions are now mostly restricted to those employed by the state the urgent need is for individuals to at least save something, even if it is perhaps not the best available. Surely any advice is better than no advice. The admission by Hector Sants of the FSA that he expects, and is comfortable with, a 30% reduction in the number of IFAs as a consequence of the introduction of the RDR is a chilling demonstration of how out of touch this organisation is with those it is supposed to be protecting. If people are to be encouraged to save for their own future, and it is hard to argue otherwise, then surely the Government should ensure that it is as easy as possible for them to do so. The current structure has grown like topsy driven by the vested interests of the established product provider and distributors, not the consumers or new low cost product providers. In other industries, airlines for example, new entrants have been able to win business by offering lower prices directly to travellers by promoting themselves through the press and new media. Imagine how much progress Ryanair and easyJet would have made if they had not been allowed to advertise their prices and were forced to sell only through travel agents? Cutting out the middle man has been a key part of the process in reducing the cost of air travel. That option is not available to investment product providers because of the requirements imposed by the FSA and this has entrenched the position of the middle man, the IFA. In addition tax wrappers such as ISAs and SIPPs have reinforced their role. However, for a variety of reasons IFAs generally use a platform to hold their investments and this second agent between the investor and the product provider is where the chain is most opaque. The exact relationships between the IFA, the platform and the product provider are not publicly disclosed, and certainly not to the investor, and yet this is exactly where the greatest scope for conflicts of interest lie. The FSA has ignored this and the Treasury Committee seems not to have appreciated the scope of the problem at all. Its only acknowledgement of the issue is its comment that it sees no justification for intermediaries to continue receiving trail commission without the provision of ongoing advice. Is it not aware that one of the largest distributors of funds in the country has built an extremely successful business model by doing exactly that? It is understandable that the Committee has listened to the representations of many IFAs about qualifications but that is a side issue in relation to the fundamentally flawed structure of the industry and how funds are distributed. The Committee used part of my submission in its report to illustrate the lack of incentive for IFAs to sell lower cost products. Why would an IFA sell a fund that has an annual management charge (amc) of 0.5% and no trail commission when it can sell a fund with a 1.5% amc and keep a trail of 0.5% as well as provide the platform with a slice of the trail? There is simply no incentive for the platforms to sell low cost funds when they are not paid to do so. In short, there is not enough fat in the system for the IFA and the platform to take a worthwhile cut. In this case there is a genuine market failure of the retail distribution system to sell low cost funds that don’t pay trail. However, there are some options. One might be to oblige platforms to carry a certain percentage of low cost, typically passive, funds. A better solution is to have a more informed public. One of the aims of the FSA was to promote financial awareness. This has not been a high priority but it is to be hoped that its successor, the Financial Conduct Authority, will inherit this ambition. In most industries a large element of the education process has been provided through advertising and marketing material. After all, if consumers can understand the complexities of computers, mobile phones and cars, and use that technical data to make selections, surely they can do the same for collective investments. Where the Government wishes to change behaviour, such as encouraging the use of fuel efficient cars, it mandated that adverts had to carry fuel consumption data. In the same way the FCA could require all adverts for investment products to include some basic data such as the total expense ratio for example. Such hard data would be far more informative than telling investors that prices can go up as well as down.The RDR has a laudable aim and it needs to be introduced as quickly as possible. Delaying it to allow a few more IFAs to take exams completely misses the point if the fundamental underlying structure fails to provide the public with what it needs; low cost access to simple investment products. Platforms can help provide that if they move away from charging both product providers and users. All they have to do is make their business blind to the product being sold by charging a percentage of the total funds under administration. That way they maintain their incentive to increase assets under administration but do it by selling a higher volume of cheaper funds. It works for airline seats, why not investments?The difference between airline seats and savings is not just about a better deal for the public. It is about the fundamental switch from funding pensions by employers and the state to individuals. Failure to do that will mean higher taxes for longer. The state has to make this transfer of liabilities as easy, and cheap, as possible. Market forces will work in time but that is not a luxury the Government can afford. It needs to use regulation to expedite the process.McEssex
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