Altus

After several years of consultation and debate, the final shape of the FSA’s regulatory regime for RDR is almost there. The outline has been clear since PS10/6 but recent consultations on platforms and disclosure have added a few more key pieces to the jigsaw and, it’s a complicated picture that’s emerging for adviser charging.

Altus has been in detailed discussions with both product providers and advisers to understand what will be required to support the radically different model of remuneration that will be introduced by RDR. This research, together with our active participation in the consultations themselves has allowed us to identify a series of fundamental challenges which need to be addressed by a future adviser charging solution:

Customer Fee Agreements

• Providers certainly need to manage the agreements but they will be fundamental to an adviser’s business model so who draws them up, agrees the T&Cs and where are they stored?
• Remuneration in the commission world starts with a product sale but that won’t be true of adviser charging where advisers might take fees from an established product.
• How will details of fee agreements be exchanged between adviser and provider systems – new Origo messages will probably be the answer.
• Adviser charges can only be deducted with the customer’s agreement so how do providers obtain and record that agreement for subsequent audit?
• With advisers paid for their advice in future, they will inevitably look to up-sell additional services to existing clients. How will top-up adviser charges be dealt with; new agreement, another approval cycle, new KFI all look like they will have to be managed.
• Customers must be able to cancel adviser charge agreements with the provider so what happens to outstanding debts and how does that get managed?

Charging shapes

• One-off charges for initial advice are not too far removed from current factory-gate models but what about ongoing service or profiled charges – schedules will be administered by providers so supported shapes need to be agreed up front.
• Fixed charges represent the simplest operational model for both adviser and provider but present obvious commercial risks for the former.
• Hourly rate is the common charging method for many professional services but how do you cope with complex transfers where a product is established (with an agreed advice fee) then more work is done later – one agreement or two?
• Percentage of contribution is probably the simplest model to operate but requires close integration with contract engines to monitor actual contributions – payment of an adviser charge on this basis without having collected the associated premium will not be allowed.
• A percentage of portfolio model will appeal to advisers especially for ongoing wealth management services but is virtually impossible for a provider to administer unless all assets are held with them – clear platform territory.

Product charging

• How much help are providers allowed, or will they want, to give with deciding exactly where to take charges from. The FSA says it doesn’t want to see the charging options a provider offers influencing advisers in product selection but it’s hard to see this not happening in practice.
• HMRC has made clear that whilst advice charges are a permitted deduction within a pension, they can only relate to pensions advice – can providers enforce this and what safeguards are needed?
• Bond withdrawals present the opposite problem; they will be a chargeable event so should providers try to minimise any associated gain?
• The same challenge (with slightly different tax calculations) applies to unit encashments from an unwrapped collective – how far do providers want to go towards providing what is effectively tax advice?

Interfaces

• It’s clear that any adviser charging solution has to work closely with a provider’s contract engines but there are several more integration points that also need careful thought.
• e-Commerce systems will still be the first point of contact for many illustrations and new business forms – complete with adviser charging agreements. Any solution will need to be able to accept agreements via this route, store, retrieve and provide charge details in the other direction.
• If CP11/03 proposals are implemented, an advisor charging solution will have numerous interactions with Illustrations systems – with new KFIs required not just for a new agreement but for every subsequent change.
• Most providers have spent years sorting out their agency management and commission payment systems and, with so much change required before 2013, they will not want to disturb that part of their landscape which will continue to operate for pre-RDR business.

What all of this tells us is that adviser charging is very different from current remuneration models so existing systems are not the best place to start. Far better to see adviser charging for what it is; a completely new model for adviser remuneration that is best served by a separate solution.

It is just such a solution which Altus is in the midst of developing – dealing with all the issues described above plus a great many more that arise when things don’t go to plan. If you want to know more about our new product or our detailed understanding of the challenges, then why not get in touch.