The RDR has taken on the form of Smaug, the dragon from The Hobbit. Even though it has yet to be seen it evokes fear and dread in the land of Middle Earth, that land of the ever open pub occupied by intermediaries and fund managers. The main thrust of the RDR to tackle the problem of trail commission is simply to ban it. Many in the industry see this as a draconian solution to a problem that is not the biggest issue the industry faces and will impose collateral damage on many. Not least of which is the likelihood that many investors will be left with nowhere to seek advice except from the banks. And few in the industry think that is a good idea, apart from the banks of course.
At the heart of the debate is the need to separate the revenue generated from selling a product to revenue from giving advice. The simplest way to do that is make it easier to compare naked products shorn of all advice. That makes it easier for the consumer to distinguish between what it costs and the advice given to sell it.
The industry could go a long way to making the market easier for consumers to understand by providing greater information on each product. More data will help investors make their own decisions on what products to use. After all, these days many people eschew advice when choosing expensive cars, mobile phones or computers. All of these are complex products but the manufacturers and trade press provide so much information that it is relatively easy for consumers to choose for themselves. There is no reason why financial products should be any different. That leaves IFAs to give unbiased advice on such things as asset allocation and tax planning which the client can either execute himself or in partnership with the adviser.
So here are a few suggestions for the industry to consider as an alternative to banning trail commission. Underpinning them all is the concept that improved investor education will reduce the risks of consumers using the wrong product.
As a start the FSA could encourage funds to publish a full list of holdings, including derivative and short positions and any stock lent out, every month. There is no need to penalise those that don’t but, presumably, investors would prefer products that…
