The RDR has two pillars: new rules reforming perverse incentives in a commission- based distribution model and new structures enforcing professionalism that will improve agent ethics and agent decision making. It is the second pillar of RDR I want to focus on.
The FSA’s preferred means of achieving higher technical and ethical standards is, in effect, a new form of self regulation, involving the outsourcing of some of its supervision responsibilities to outside agencies in the form of accredited professional bodies. This is excellent news for the IFP, having satisfied the initial conditions of accreditation by the FSA. But is it good regulatory policy for the industry as a whole? I don’t think it is.
From the standpoint of the economic viability of the advice sector, imposing a professional business model is a dangerous experiment, more likely to shrink consumer access to advice than improve it. By a professional model I mean one in which all staff delivering advice to the public are trained and qualified by exam to an equivalent standard. In the marketplace for tied advice, independent advice and private wealth management, that involves over 50,000 individuals.
The professional model is a flat and very inefficient way to organise resources. It is therefore rarely seen in economically-independent businesses whose services (unlike many true professions) are not partly or largely paid for out of the public purse. These businesses survive by adopting hierarchical structures for developing, holding and disseminating skills downwards and outwards, emulating scalable industrial processes. Banks are examples of hierarchical structures for delivering advice. The Simplified Advice concept, still under discussion, also presumes hierarchical structures, including ones reliant on technology.
Though the firms which IFP members typically work for (my own included) are more likely than most to look like the professional model that the FSA envisages, we surely are contributing to, rather than reversing, the tendency for the entry level for advice to move out of reach of an increasing number of consumers. We are pushed upmarket instead of down because we lack economies of scale and are limited in broad management skills (like many professional service firms) and capital.
I believe the proper public-policy goal of RDR was to reform incentives while increasing access. It therefore made more sense for the FSA to focus its attention on the banks rather than IFAs or wealth managers. In most countries banks are the key to mass access to advice, having the industrial economics necessary to deliver solutions cost-effectively. True, they have been badly regulated here for a long time, as we can see in the high proportion of upheld FOS complaints. But that does not mean we can afford to lose them from the marketplace, an increasingly possible impact of the RDR.
Even if the public benefit of higher technical standards of financial advice and product design were worth some sacrifice in reduced public access, it is questionable whether the RDR will improve technical standards, other than via the reforms of perverse incentives. The FSA presented no robust, quantitative research to demonstrate a connection between poor outcomes and poor skills.
As a practitioner member of the working group guiding the Financial Services Skills Council in drafting the new exam standards, I was not at all convinced that either the broader scope or different learning outcomes of the new standards would make a significant difference to the practical welfare of customers. Finally, endorsing a professional business model in the expectation it will raise standards invites the awkward question whether we really are a profession. We do, after all, lack a science base with explanatory theories constantly exposed to academic and professional testing.
The activities performed in the advice market do nonetheless draw on existing bodies of knowledge we tend to think of as professions, notably economics and investment. However, it is striking that in the institutional investment market the closest parallels to Financial Planning (pension consulting, asset/liability modelling, risk modelling) were developed not in the investment industry but in the actuarial profession, which is scientific. The analysis of the economics of a household should draw on theories of utility, capital efficiency and holistic risk management. They are nowhere to be seen either in the foundation knowledge we teach or the practice we recommend. We are handicapped by the lack of academic interest in these scientific approaches to household finance.
Many advisers make a virtue of detaching planning from investment, not recognising that investment is the main source of expertise when planning in times of uncertainty. It was to challenge these weak or non-existent links in institutional investing that liability- driven techniques were developed that customise solutions, applying principles of utility and risk budgeting. Similar breakthroughs in retail finance will come from industrial-scale operators, not small service firms. Ironically, therefore, it is the two delayed components of the RDR, platforms and Simplified Advice, which hold the key to better and more affordable advice services.