Listening to many financial advisers, you would think the introduction of the Retail Distribution Review in 2013 will adversely affect employee savings as they lose access to ‘free’ advice.
I heartily disagree. It will bring transparency to the charging structure of financial products and dispel the myth that the advice is free. Paying a fee, although seemingly high at the time, is frequently lower than the overall commission paid to an adviser or provider over the course of an investment. Under the new regime, without commission being taken out, more money will go into pension fund investments, leading to a bigger final pension for workers.
I would also argue that most numerically-literate, average-earning employees can manage to make sensible decisions about a simple pension and a few other savings vehicles as long as they have access to workplace financial education (offered free by the Consumer Financial Education Body) and the personal finance press. Higher-rate taxpayers and those with more complex benefits, such as share schemes, will need more help, but these are a minority and the financial services industry is only too willing to offer them services (for a fee).
On the topic of fees and staff getting a fair deal, the charges on investment funds are concerning. Few people understand this area, which raises the possibility of high charges for specialist advice, with few being the wiser as to whether this will result in better returns.
I assume most benefits and HR people do not consider themselves experts in investment funds. But with the rise of contract-based defined contribution pensions, such as group personal pensions, it is benefits and HR managers who sign up for particular pension fund choices and default funds. Their choice will have a major effect on a workforce’s final pension pots. It is time for employers to step up and flex their consumer muscles on pension investment choices and the fees that employees pay.
If this doesn’t convince you, then it is sobering to note that asset managers’ salaries are once again on the up in order to compete with rapid wage inflation in the investment banking sector, according to a survey by PricewaterhouseCoopers last month. Are you really happy that your employees might be paying for this through their pension fund investments when you can’t be sure they are getting value for money?
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As someone who has worked in employee benefits for a number of years I was surprised at your seemingly one-sided view that fees are the panacea for employee benefits. While most larger employers are comfortable with fees, withdrawing the option of commission (which can be paid in a number of ways) will reduce the element of choice for many companies. I have always felt that your magazine was unbiased in its reporting.
With the potential introduction of IGG guidelines on investment governance and the requirement to offer decumulation support, employers will need advice and not all can afford to pay for this. While the CFEB does an excellent job, it cannot replace quality independent financial advice.
I welcome the RDR and wholly agree that large up-front commissions, even though they are factored, can have a detrimental effect on both the policyholders and the sponsoring employers. Having taken the commission, the adviser is no longer incentivised to maintain an ongoing relationship.
However, in the current economic climate, employers are facing mounting pressure on costs and therefore are not always in a position to pay explicit fees, however reasonably priced they may be. Commission, especially taken as premium-based or fund-based can allow the adviser to cover their costs, reduce or offset fees to the employer and still provide good value for employees.
However well-meaning, the RDR will restrict choice for employers, especially small ones, at the exact point when they need all the help they can get to drive their businesses out of recession. Also, many providers are only interested in quoting for larger schemes, whether with or without commission.
I am genuinely concerned that withdrawing commission – of all types – is a bridge too far and will lead to a reduction in the availability and quality of advice for employees.
Surely, allowing employers a choice as to how they support their employee benefits in terms of adviser remuneration must be better than restricting them to paying fees – which many can simply not afford.
Regards
Mark Hodson
Senior Adviser
Bourne Group of Companies