RDR around the world

Anybody who follows the UK financial services services market will be well aware that the Retail Distribution Review (RDR) is set to shake up the financial advice model and the pricing of many investment services. But the UK isn’t alone in this – while RDR is the first major review to come into effect, a number of other countries have been looking at similar measures.

The FT has a recent piece on the pending commission ban in the Netherlands – it’s probably paywalled for most readers, but the first couple of lines give the gist:

Dutch banks are putting pressure on asset managers to review their fund ranges in light of a self-imposed ban on inducements that will debut in January 2014.

Managers say they must create share classes that have commission payments stripped out if they want to maintain their lucrative business ties with large distributors such as ABN Amro, Rabobank and ING.

It’s interesting to see that the Dutch banks (in the Netherlands, as in most continental European markets, banks are the main fund distribution channel) are being fairly proactive about this. That contrasts with the UK experience, where many parts of the industry have left things as late as possible: Some kind of ban on trail commission to discount brokers and platforms seems almost certain within a year and yet very few firms have introduced unbundled direct-to-consumer pricing.   However, the attitude of Dutch distributors is still in a minority around the world. For example, Singapore announced its Financial Advisory Industry Review (FAIR) in March 2012, aiming to improving the quality of financial advice and lower costs.

This may ultimately lead to a ban on commissions and a move towards explicit fee-based financial advice, as is intended under the UK RDR, although this outcome is not yet certain. Unsurprisingly, many in the industry are resisting this as strongly as their UK counterparts.

An ad-hoc alliance of about 15,000 financial advisers and managers are hoping to sway a review panel, which is considering, among other things, doing away with the commission model that most insurance and financial advisory firms use.

The alliance is arguing that the move towards a fee-only model – essentially a fixed fee for advisory services – would endanger the livelihood of the financial advisers.

The fear that commission bans will drive out smaller players and concentrate distribution into a handful of large firms is a very real one (and is an obvious reason why Dutch banks are happy to go along with it, given their dominant starting position). However, any industry that starts from the perspective that transparency on costs is bad is in a sticky position in the modern world.

Hidden commissions hurt investors

Financial services have always had a tendency to take advantage of complexity to overcharge the lay client. A cursory scan through the broker directory shows that the fee structures of many international brokers are still needlessly complicated, even two decades after the first online brokerages began to shake up the industry.

But the problem remains especially severe in fund distribution. Even legitimate adviser or broker channels do investors a disservice by hiding their costs in commissions – it may not be intentional, but the fact that the investor doesn’t have a full picture of what their investments are costing them contributes to a failure to understand the impact of fees on investment returns.

In many jurisdictions, less legitimate advisers (or, more accurately, salesmen) take full advantage of this complexity to push ludicrously expensive offshore investment bonds (also known as offshore portfolio bonds) to an client base that doesn’t know better – the expat community being especially at risk here. Explicitly handing over the equivalent of months or years of premium payments up front to pay the salesman’s fee – rather than having them quietly syphoned away over many years – might make some investors more circumspect about signing up for these plans.

If the trend for distribution reviews around the world means that the old commission model begins to be swept away, it’s hard to see that as a bad thing. Yes, it may well cause a great deal of difficulty for some firms in the near term and it may well be that it leads to a reduction in the number of people seeking advice, as critics claim. But it still makes more sense to try to deal with these problems from an initial position of transparency and fair dealing rather than opacity.

And obviously the more widely that starting point applies, the better. Hopefully, RDR, the Dutch inducements ban, FAIR and other plans in the pipeline in other jurisdictions are only the beginning of a long-overdue shake-up of fund distribution around the world.

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