If you read nothing else, read this…
• Under the RDR, after 1 January 2013, all independent financial advisers and employee benefits consultants will be remunerated on a fees rather than a commission basis.
• Under commission-based charging, when a product such as a pension scheme is being purchased, the provider pays the adviser. The fee-based model puts the payment in the hands of the employer or employee.
• RDR will only affect schemes set up after 1 January 2013.
Case study: The pension advice fees effect
Jane Doe joins her company pension plan in February 2013. She will pay in £1,000 a year, which is matched 100% by her employer, a total of £2,000. The £400 fee for advisory services (that is, excluding annual investment fees of 0.4%) comes out of the employer contribution, so £1,600 is invested in the first year.
This is different to the provider-paid model, which will be common practice up to 1 January 2013. Until that date, the full £2,000 will go into the pension scheme and 0.6-0.7% of the growing pension fund would be dripped out as an annual management charge (for both adviser and investment fees) until Doe buys a retirement annuity.
Depending on the growth of the pension scheme it will be a different amount to the flat-rate £400 taken out after 1 January 2013.
The retail distribution review aims to bring more transparency to payments for financial services, says Jennifer Paterson
When the retail distribution review (RDR) comes into effect on 1 January 2013, financial advice, education and guidance around pensions and other investment vehicles from independent financial advisers (IFAs) and employee benefits consultants (EBCs) will have to be charged on a fee, rather than commission, basis. The new RDR model will be called consultancy charging.
With commission-based charging, when a firm’s product, such as a pension scheme, is being purchased from a provider, the provider pays the adviser directly. With the fee-based model, the payment requirements are put in the hands of the employer or employee. Basically, the conventional adviser-provider relationship will be replaced by an adviser-employer one.
Andrew Power, lead RDR partner at Deloitte, says: “After 1 January 2013, the direct relationship with the employer, such as providing workplace-based savings, giving seminars, encouraging employees to sign up, must be done on a fees basis.”
Three options for paying advisers
There are currently three options for paying advisers. Under the first option, employers choose the services they want and pay the adviser fees. In the second option, the provider-paid commission model, the commission creates a slightly higher annual management charge (AMC) for members, generating enough revenue for the advisory firm as intermediary not to bill for its time. The third is employee-paid, where the member sees a deduction from their first year’s contributions to pay for the services.
At present, the most common method is provider-paid, but this will be completely eliminated by the new legislation. Jamie Jenkins, head of workplace strategy at Standard Life, says: “The cost of remuneration will become more transparent, so employers are not impacted directly, but they need to be aware of that. The actual impact is more transparent because it is likely to be that the money paid to the adviser comes, pound for pound, off the member’s policy, whether that is an ongoing monetary amount or a percentage of the fund.”
Remuneration for financial education will also be transparent, because commission will no longer be paid for non-specific advisory services. This has raised concern that employers may reduce the provision of financial education if they have to pay a separate fee. James Biggs, head of corporate pensions at Lorica Employee Benefits, says: “If consultancy charging is used, members will know the cost and what they get for it. There is a downside to this. Both parties (employer and employee) may opt not to pay and financial education levels may reduce.”
RDR will give employers an opportunity to review their pension plans and make sure their services are fit for purpose. Biggs says: “It is possible to put in place a commission-based deal this year that runs in perpetuity. It is only new schemes from January 2013 that cannot be commission-based.”
Carry on paying commission
Employers that pay commission and do not make any significant changes to their pension scheme in 2012 will be able to carry on paying commission on the current basis. Steve Herbert, head of benefits strategy at Jelf Employee Benefits, says: “If the scheme is likely to change, in structure or in population – and with auto-enrolment most are likely to change – the provider will see that as a significant change and will not pay commission any more, moving to a fees basis.”
The fact that RDR is coming in at the same time as the 2012 pension reforms provides an opportunity for advisers to write new business ahead of auto-enrolment on a provider-paid commission basis. Steven Cameron, head of regulatory strategy at Aegon UK, advises employers to consider implementing a new pension scheme in 2012, whether in preparation for the reforms or not. “Employers should be praised for doing that, rather than worrying about regulation,” he says. “Advisers will be very busy when auto-enrolment kicks in, so they might want to get schemes in place in 2012 rather than waiting for the last possible minute.”
Communication with staff will be a key focus with the pension reforms taking effect from October 2012, but RDR ups the ante. Deloitte’s Power says: “If there is an adviser involved, doing communication or holding seminars with staff cannot be taken from commission. It will have to be a direct fees-based relationship with the employer, or a mechanism for the employees to pay a fee.”
Commenting on the timing of RDR, Biggs adds: “There does not seem to be any common sense to it. It all seems a bit random and a bit ill thought-out. It is complete carnage at a time when we need to be promoting pension schemes and retirement planning.”
Types of commission
• Trail commissions: The provider pays the adviser commission up front and then builds an amount into the policy that is being paid every year. This may be a percentage of the amount being paid in, but is often fund-based and grows as the fund grows.
• Factor commissions: The commission is paid in full up front instead of trailing.
• Legacy commissions: A commission arrangement where there is new money involved, even if it is an old contract. With RDR, the new money will no longer be payable by commission.
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