These payments formed a key focus for the FSA’s RDR commission rules. Extending a commission ban to platforms risked undermining a firm’s business model (many are performing badly financially anyway) but not doing so invited the risk that platforms would allow investors and their agents effectively to avoid the commission ban by making greater use of platforms for that purpose.  Clearly, therefore, platforms were always crucial to the effectiveness of the RDR project.

After consulting for three years with providers, platform managers and agents, the FSA has decided to postpone any decisions about the cash payments between providers and platform, and about rebates from platforms to customers, that are absolutely fundamental to their business models before and after RDR. They have said no decision will be made before other RDR rules changes come into effect, 1^st January 2013.

Considering the potential for a commission ban to leak away to nothing if agents route all business currently earning commissions through a platform (a point made in our recent assessment of the RDR project), and considering that any different treatment of platforms from other forms of distribution would perversely encourage new biases in the marketplace, this is an astonishing admission of failure on the part of the FSA.

The failure is not so much one of indecision now but of strategic naivete and poor analysis at the outset of the role of platforms in modern distribution systems. This is a criticism of the FSA’s handling of the project. Since our earlier paper had made other criticism of process, we thought it was worthy of a press release.

To read the press release click here

In most of RDR’s key respects, Parliament’s intervention has come too late, realistically, to delay or scrap it, although we highlight two aspects that it is not too late to work on: Simplified Advice and the proposed new distinction between Independent and Restricted Advice.

The impact of RDR will be to accelerate the widening ‘advice gap’ as rising costs push the entry level for access to advice beyond the reach of more people. The other side of the trade off is higher standards of advice for those that can reach it.  Higher standards are hard to argue with but, in light of the likely impact on access, the FSA needed a high burden of proof that the trade off was worth making. This it failed to do, with barely any rigorous quantitative analysis to support its presumption of better outcomes for consumers.

The paper supports the FSA’s actions on perverse incentives that have clearly damaged outcomes. Indeed, we have long criticised the FSA’s foor dragging on commission bias and its apparent inability to deal with high street banks’ remuneration strategies that clearly encourage mis-selling. The original independent reviews that highlighted these problems (including one I wrote up for the Centre for the Study of Financial Innovation) go back a decade or more. But if action on incentives could change behaviours as the FSA believed, it was not necessary at the same time to risk the trade off it did between imposing a ‘professional business model’ on the industry (a luxury the economics of the advice market simply do not support) and widening the advice gap.

Download Reforming the financial advice market: bridging the gap or widening the chasm

If so, RDR may end up being judged as the wrong way to achieve better consumer outcomes – unless you only count the outcomes of people able to afford advice.

As background information, Stuart says that there are about 50,000 individuals authorised to deliver retail financial advice in the UK, mostly in small firms well dispersed across communities. Discretionary wealth managers and private client stockbrokers, also drawn into the RDR, represent only about 10% (and account for very few customer complaints against the industry). The largest sector in terms of ease of access (rather than numbers of advisers) are in high-street banks and so the recent decision by Barclays to pull out of branch-based advice suggests the FSA does have a case to answer.

You will find plenty of venom directed at banks on this website but we still have to note that banks are the dominant force in distributing investment as well as savings products in virtually every country. So the public policy goal of access meant the FSA had one overriding priority for RDR: reform the banks but whatever you do don’t drive them out of the market. Oops.

Pauline draws attention to Total Expense Ratios (TERs) as a means of estimating the ‘all in costs’  and asks for the opinion of  Stuart Fowler. “The key is whether the activity of the manager offers value for money”.

Stuart points out that portfolio turnover (a measure of how frequently assets within a fund are bought and sold by the managers)  has risen hugely over the past decade or so, but  with trading costs reducing,  the overall effect has been neutral.  He goes on to say the average active manager underperforms the benchmark by the amount of the average TER. They would underperform by more if their trading activity did not add value.

To read the article, “A lot of  indignation but no change”, please visit the FT website.

IFAs who are quick to criticise the record of insurers and banks at matching product solutions to client needs do usually also concede that the changes in the RDR aimed at reducing bias and improving standards will cut across the other RDR objective of increasing access to advice. As the ABI paper suggests, RDR is perversely increasing the advice gap and it has been left to the industry to come up with proposals to plug it.

The CRA costs paper suggests that the bank channel, which of the existing models is closest to new Simplified Advice processes, has average costs per successful sale to a new customer (combining time, salary and overhead differences) across pensions, investment and protection products of just over £200 compared with just under £600 for all IFA channels (p46). The ABI sees IT and standardisation of processes as the key to the existing lower-cost delivery in the bank channel. This is also the basis of its Simplified Advice proposals, combining technology with multi-media guidance using what it calls ‘facilitators’.

I am a great believer in technology as the key enabler in improving access and reducing costs. This holds whether the computer-based applications are viewed on screen at home or in a branch, with or without telephone support. Since I first got involved in web-based financial planning and investment decision tools in the late 1990s, use of the internet as a source of financial information has grown exponentially and the cost of technology has fallen, supporting greater sophistication both under the bonnet and in the visible front end. Think games.

For a critic of the industry’s technical skills I am counter-factually totally unimpressed by the economics of increasing skills to Level 4 at all points of interaction between the public and the industry. The ABI is also right on this one. I have never seen evidence that this will alter the incidence of bad advice. However, distributed skills via technology could raise the quality of advice to the best available and that is a lot higher than the best possible across some thirty thousand retrained people.

I am conscious banks will hardly look like the right role model for systematic processes, given their appalling record of misselling. But the record reflects two sources of implementation error. First, the design of the decision processes themselves is flawed (evident, for instance, when I investigated Lloyds TSB’s internal procedures). Second, with the best will in the world how staff actually apply them is compromised by brutalist sales incentives, which could be halted instantly if boards of directors were so minded.

The ABI paper deals with the challenge of an economic cap on what consumers will pay for advice. Perhaps because it wishes to move on, it does not make too much of the fact that RDR has largely created that problem. Unbundling makes a move to cost-based rather than value-based charges almost inevitable. It therefore threatens to halt the subsidy by wealthier customers that has kept small customers in the game. The law of unintended consequences could have been written specially for regulators.