RDR : Remuneration for financial planning

Transcription

1 RDR : Remuneratin fr financial planning The prpsals fr intermediary remuneratin fcus n achieving greater clarity in terms f the types f activities which make up advice, intermediatin and utsurced services including n whse behalf the services are rendered. Remuneratin fr advice will be based n tw criteria. The first is that it will be calculated based n the ability t define the varius activities cmprising the delivery f the service. Secndly, it will take int cnsideratin wh the individual r entity is that will benefit frm receiving the advice. The FSB has set ut certain principles fr remuneratin. Fr example, remuneratin shuld nt cntribute t cnflicts f interest, it must be reasnable and in line with the actual service prvided and all fees which are paid by custmers must be mtivated, disclsed and explicitly agreed t by the custmer. Remuneratin structures shuld als strike a balance between the upfrnt advice and intermediary services and any nging supprt r advice given. The intentin is t ensure that the remuneratin structures prmte level playing fields and t ensure that custmers can easily cmpare the different types f services and fees. In this article we explre the FSB s prpsed remuneratin structures fr services/activities delivered t custmers, with a specific fcus n financial planning advice. Financial planning is abut prviding advice and helping custmers plan fr and meet their life gals fr life and investment advisrs. Inherent in this is a financial plan. It may als include nging reviews f the plan. Fr mst advisrs, this will be nthing new. Fr shrt-term insurance advisrs ne can define this as risk planning, including risk finance cnsulting, lss cntrl advice and surveys and risk management advice. Specific fit and prper standards will be set fr entities r individual wh prvide financial planning, upfrnt and nging prduct advice. In the case f delivering financial planning services, the advice fee will be negtiated with the custmer. As mentined in last week s article, designing yur value prpsitin is step number ne. This is a wnderful pprtunity t repsitin the services yu deliver t existing and ptential custmers. N lnger is the financial plan part and parcel f what yu d, thrwn in fr free in rder t make the sale f a prduct. It is nw the prcess and service which results in the financial plan that shuld be analysed, understd, itemised and csted in rder t ensure frm the custmer s pint f view, that they will be willing t pay an advice fee fr it. A value prpsitin shuld supprt the types f services yu have identified as thse yu will be delivering t custmers as it is the fundatin upn which yur remuneratin will be based. Activities need t be clearly defined and yu need t take int accunt which resurce is best psitined t deliver these activities in the mst efficient and prductive manner and mst imprtantly t what extent these activities will add value t the custmer because that is the ne wh will benefit frm the receiving the advice and wh will be paying fr it. Furthermre the value f yur financial planning services as experienced by the custmer will be influenced by the type f advice, expertise and supprt services yur business can prvide, e.g. the advisry prpsitin fr a FSP wh fcus n high-net-wrth investment advice which nly supplies a

2 financial plan and n executin is likely t be very different frm the advisry prpsitin used by a FSP wh prvides financial planning and executin fcusing n retirement planning fr mass-market clients. What are sme f the questins yu shuld be asking yurself? 1. What services d yur custmers understand and value the mst r the least? Imprtantly, it s what THEY value, nt necessarily yu. 2. Cnsider the prfile f custmers that yur business currently attracts. Are they the types f custmers yu wuld like t attract, if nt, what des the prfile lk like that will appreciate the value yur financial planning advice? 3. Is the prfile f custmer (current and prpsed) likely t be prfitable fr yur business 4. What is the type f advice yu culd best ffer, given cre areas f cmpetence and resurces yu have? 5. What are the skills, attitudes, experience and spirit in the business? What makes yur FSP different t cmpetitrs? Why shuld they d business with YOU? Areas that culd further influence yur value prpsitin are whether yu are a small r larger FSP. Des the business have the ability t deliver the value prpsitin and therefre deliver n prmises made? FSP s ften serve many different client types and pssess a range f areas f expertise. It might be wrth cnsidering whether a diverse range f client types and activities can prvide the business with incme streams that a narrw r specialist business may nt be able t d and, at what cst? Research cnducted by Harris Interactive n hw cnsumers value advice shws sme interesting results. Custmers rated the fllwing pints as the mst valued aspects f financial advice received: 1. The advisr s recmmendatins are based n the understanding f my needs - nearly half the face-t-face respndents rated this as the mst imprtant. 2. They help me better understand my ptins 3. Their expert pinin 4. Impartiality f advice 5. They save me time by researching ptins n my behalf 6. Persnal relatinship 7. They keep me n track with my financial gals and bjectives 8. They practively mnitr my investments and keep me infrmed 9. They let me knw abut pprtunities as they arise 10. They prvide me with written reprts The mst valued attributes f independent financial advisrs 1. Prfessinalism f the adviser almst 50% f face-t-face respndents rated this as the mst imprtant. 2. Independence f the advice 3. Adviser s reputatin 4. Adviser s qualificatins 5. Strength f persnal cnnectin with the adviser 6. What they charge

3 RDR : Services Cnnecting Custmer and Prduct Supplier The RDR prpsals seek t give retail custmers cnfidence in the retail financial services market. The key structural changes are t make sure that custmers receive fair treatment by placing greater respnsibility n prduct suppliers, t address a variety f cnflicts f interest by defining the type f remuneratin which can be earned and frm whm and t ensure greater understanding by clear, transparent and fair disclsure. Fr this reasn, the activities which make up a financial service t a custmer need t be clearly defined s that the remuneratin fr an activity can be paid fr by the persn wh is benefiting frm that activity. As we discussed last week, the 3 brad activities set ut in the RDR Discussin paper are: 1. Services t custmer; 2. Services linking the custmer and prduct supplier; 3. Services t prduct supplier. There are many activities which an advisr perfrms, sme f which are prescribed by legislatin. In the current structure, remuneratin fr the different types f activities is ften cmbined and it is nt always clear wh is paying fr what. Advisrs will need t be able t classify the different types f services that they give t their custmers s that their value prvided at each pint in the prcess f rendering a financial service t a custmer is clear and defined. Masthead already prvides supprt t its members by running seminars and wrkshps reginally that prvide guidance t advisrs in defining their value prpsitins. Lking at sme f the services which cnnect prduct suppliers and custmers, the FSB separates the activity f sales frm nging prduct maintenance/servicing as fllws: Sales Executin relates t the activity f selling a prduct which can be dne with r withut advice. Where it is dne with advice, the remuneratin fr the advice is separate frm the remuneratin fr the actual selling f the prduct which is where an advisr truly intermediates between the prduct supplier and custmer. Sales Executin will be defined in the regulatry framewrk and standards set regarding the prvisin f this service. Onging Prduct Maintenance/Servicing relates t the after-sales maintenance and servicing which an advisr prvides t a custmer in relatin t the financial prduct which has been sld. This is where an advisr acts as a g-between t facilitate pst-sales transactins such as: Prduct related cmmunicatin Rutine administrative queries by custmers in relatin t a prduct Executin f prduct changes such as beneficiary alteratins, exercising benefit ptins Cllectin f insurance premiums Claims and disbursement management such as receiving and submitting f claims r helping a custmer t access funds. These services are separate t any nging prduct advice that may have led t r be prvided tgether with the administrative service cncerned.

4 An advisr needs t always distinguish between advice giving activities and thse which are mre administrative in nature and are perfrmed as a g-between. Thse services which link the prduct supplier and the custmer must be paid fr by the prduct supplier (except in the case f investments) as they culd have been perfrmed by the prduct supplier in the absence f the advisr. The activity f selling wuld take the frm f sales cmmissin, while remuneratin fr nging prduct maintenance r servicing wuld take the frm f a service fee bth paid by the prduct supplier t the intermediary. Imprtantly hwever, it is prpsed that prduct suppliers will be prhibited frm remunerating advisrs in the frm f cmmissin r fees fr the sale r servicing f investment prducts. This means that nly advice fees may be charged by an advisr in respect f investments, further details f which will be dealt with in a separate article. Turning t life insurance risk business, lng-term insurers will be able t remunerate an advisr directly fr selling life risk plicies as well as fr certain types f nging servicing r maintenance f such plicies. Hwever, because cmmissin payable under current regulatin presuppses that this will cver bth the cst f advice and ther intermediary services, by separating these services, advice t be paid fr by the custmer and intermediary services t be paid fr by the prduct supplier, the amunt f cmmissin payable shuld be reduced as this will nw nly remunerate intermediary services and nt fees fr advice. One f the principles discussed is that an advisr shuld nt be paid twice fr the same service. As a result there will be changes t the maximum cmmissin levels allwable but these have nt been defined as further wrk is required befre these can be determined. As always, Masthead will gather input frm its members and make submissins t the Regulatr as it will be imprtant that maximum levels supprt the bjective f sustainability. This des nt mean that an advisr will have t earn less. It means that the way in which the advisr will be remunerated will change. Cnsideratin was given t the case against full as-and-when cmmissin and it has been prpsed that a balance be struck between up-frnt and nging cmmissin with 50% upfrnt and 50% nging cmmissin. This will be 50% f a lesser maximum amunt which is still t be determined. The prpsals als pint t a prhibitin n any frm f cmmissin payable by a prduct supplier n replacement business. This means that any activity in regards t a replacement plicy which cnnects a prduct supplier and a custmer cannt be remunerated by way f cmmissin. Hwever, an advisr can still charge a client fr the advice, bth upfrnt and nging. This prpsal may need t be carefully cnsidered t ensure that unintended cnsequences d nt prejudice the custmer. Masthead will be cnsidering feedback frm its members t ensure that cnstructive cmment in regards t this prpsal can be included in the frmal respnse t the Regulatr. PREPARING FOR THE LONG-HAUL: In unpacking a small sectin f the RDR Prpsals, the imprtant questin is what can advisrs d t prepare fr the changing envirnment. Advisrs will need t first decide what their lng term gals are and whether remaining in the industry frms part f these gals. If they are in fr the lng haul, then it is imperative that early preparatin begins s that they can drive the change in their wn business which will be needed t adapt t the new envirnment. Advisrs are able t earn and be remunerated fr all the activities which they perfrm bth fr their custmers as well as fr prduct suppliers. Being abslutely clear abut the types f activities which are perfrmed, the value ffered, what they can charge and wh is respnsible t pay will frm the grundwrk fr an actin plan t ensure a safe transitin frm the current business mdel t a cmpletely verhauled mdel. The FSB has given assurances that there will be a phase-in perid and frm ur interactin with advisrs in the UK, it is clear that thse advisrs, wh begin sner rather than later t prepare their businesses fr the change, will have a greater chance f success.

5 The end f SIGN-ON bnus The sign-n bnus ban has becme reality as Bard Ntice 146/2014 was published n 4 th December 2014, incrprating its prvisins int the General Cde f Cnduct (the Cde) and amending the Cde. Althugh this was dealt with separately, the issue f sign-n bnuses was addressed in the RDR discussin paper, and supprts the bjective f addressing cnflicts f interest and prmting fair cmpetitin. The amendment prvides that: A Categry I prvider that is authrised r appinted t give advice may nt receive a sign-n bnus frm any persn. N persn may ffer r prvide a sign-n bnus t any persn, ther than a new entrant, as an incentive t becme a Categry I prvider that is authrised r appinted t give advice. Masthead, alng with ther cmmentatrs, submitted cmments in respnse t the draft amendments and the FSB addressed several cncerns raised by the industry regarding the draft amendment released earlier this year. The amendment defines: sign-n bnus as any financial interest ffered r received directly r indirectly, upfrnt r deferred, and with r withut cnditins, as an incentive t becme a prvider; and includes, but is nt limited t, cmpensatin fr ptential r actual lss f any benefit including any frm f incme, r part theref; r cst assciated with the establishment f a prvider's business r peratins, including the surcing f business, relating t the rendering f financial services; r a lan, advance, credit facility r any ther similar arrangement. new entrant as a persn wh has never been authrised as a financial services prvider r appinted as a representative by any financial services prvider. The Registrar, as regards prviders wh are nt new entrants, recgnises that industry may have t restructure remuneratin arrangements t prvide fr basic salaries. Therefre the prhibitin des nt restrict a prvider frm structuring its remuneratin arrangements in such a manner that it prvides fr a basic salary. Hwever, such remuneratin arrangements must be equally available t all emplyees and nt nly a select few. Whether r nt a remuneratin arrangement amunts t a sign-n bnus is a factual questin that will be cnsidered against the prvider s nrmal remuneratin arrangements, the extent and equivalence f participatin by all emplyees and whether the arrangement is cmmensurate t the services being prvided. Please click here t dwnlad BN 146 f 2014 and click here t view the Respnse f the FSB t Cmments Received.