How we can avoid the problems RDR will give the independent adviser

One of the major concerns surrounding the Retail Distribution Review (RDR) is the remuneration of intermediaries. While there are no firm guidelines on the direction this will take, one can only make assumptions on what the remuneration model may look like.

We received an interesting viewpoint on the possible RDR remuneration model from Altrisk Managing Director Michael Blain and we thought we will share it with you.

Dealing the IFA a serious blow

As the debate around RDR rages forward, I firmly believe that removing commission outright as a form of remuneration will be a serious blow to the independent financial adviser (IFA).

In fact, I believe it could be the demise of the IFA if we don't get the RDR model right from the outset. And it is in no one's interests to see the demise of independent advice. Not for consumers, not for product providers, not for regulators. Independent advice is a fundamental cornerstone of consumer protection.

Moving to a more balanced and recurring means of adviser remuneration as purported by RDR is going to be tough, and there will be many unintended consequences that we need to thoroughly analyse in moving towards a solution.

Moving towards a sustainable model

Will it be in everyone's best interests to move toward a better, more sustainable model? Without a doubt it will be. The current system essentially only incentivises a product sale and not the long term care of the needs of the consumer. However, the path that we navigate to move away from this perverse system is going to be a tumultuous one for many reasons.

Firstly, for the most part IFAs are small businesses. They have a significant number of overheads and, because they are independent, they don't have a ready source of business for new leads. IFAs face enormous costs in terms of lead generation and finding new prospects, assessing their client's needs and providing advice and then matching the correct risk products to meet their client's needs, through intermediation. Upfront cost is a significant hurdle, and currently the only remuneration available to the IFA is commission on new product sales.

Secondly, a significant challenge we face is that consumers are largely unwilling to pay for advice upfront, so essentially it has to be financed. Currently, the product provider advances this finance to the intermediary in the form of upfront commission but only when a product is sold. The immediate concern is how IFAs will finance their businesses and run their affairs if commission is outlawed or reduced, given that many don't have large pools of capital to finance their practices.

Obviously if the model had been different from the outset, and the industry had worked on an on-going commission basis that takes into account the long term servicing needs of the client and the broker, we would be looking at an entirely different ball game today. Unfortunately, the situation we find ourselves in today was created by product providers who dangled carrots and said go out and sell at all costs; the more you sell the better. This is an old world reality that has no place or future in the world of today where consumers are savvier, wiser and more in tune with their fundamental rights than ever before and rightly so.

RDR is not a new debate and has largely come about as a result of a greater focus on consumer protection. There have long been pressures within international markets to move away from front-end loaded remuneration toward a solution that encourages the development of long-term client relationships. However, such a drastic change brings with it serious concerns around the impact that such a move could have on the future solvency of a myriad of IFA practices. In particular, because broker economics are already under pressure due to competitive market conditions, an increased regulatory burden, the cost of administration and a prolonged weak sales cycle in a depressed economic environment.

Apply changes with caution

When it comes to making changes to this model, IFAs are most at risk. Tied agents and employed sales people are potentially better insulated as the product providers are more likely able to reinvent their models and access the significant funding that will be needed to transition their staff to new income models.

IFAs also need to lobby hard, and urgently, to ensure that people performing similar roles are remunerated similarly. Equivalence of reward is a serious issue. We cannot have a situation where tied agents are being paid significantly inflated fees compared with the IFA. The practice by product providers of using large books of orphan policies to cross-subsidise and inflate payments to tied agents while IFAs receive less remuneration for the same work must stop.

The current intense production pressure which results from the upfront commission model also inevitably leads to the churn of existing client bases, which is almost never in the interests of the consumer. The bottom line is that a more progressive remuneration environment with more emphasis on on-going commission would lead to churn being much less of a factor than it currently is.

The payment of full upfront commission on a replacement policy is a further inducement to churn business and must be confronted urgently to end this worrying trend. The key point here is that the RDR has come about as a direct result of the aggressive pursuit of growth and financial gain at all costs, which goes directly against the principles of sustainability and consumer protection embodied in insurance and Financial Advisory and Intermediary Services legislation.

RDR must ensure profitability

Whichever way RDR may go, we must ensure that independent brokerages are able to appropriately prepare for such regulatory changes while ensuring that their businesses remain solvent and profitable. If we truly value independent advice, we need to lobby and engage with the representative bodies to ensure that IFAs don't get lumbered with draconian laws that hold the threat of many unintended consequences.

IFAs cannot be left alone to fight for their right to survive. As product providers, we need to stand up and make right by the industry, the adviser and the consumer. It's time to focus our energy on building a sustainable, professional and respected financial services industry that values independent advice and to stamp out self-interest and greed.

Editor's Thoughts
If you have any comments on Michael Blain's views, please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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