In its April 2014 review of RDR implementation, the FCA highlighted its aims to make the market more competitive in favour of consumers. What steps should execution-only brokers take to address those aims, before regulation is imposed, to get ahead of competition and gain customer loyalty and trust?
The review - ‘Supervising retail investment firms: being clear about adviser charges and services’, TR 14/6 – focused on helping customers make informed choices and ensure that advice is provided based on the best product for the client rather than a product that is lucrative for the adviser.
Recent research conducted by Capco suggests that retail investors using all types of investment services continue to be insufficiently clear about what they get in return. The FCA’s review found that ‘wealth managers and private banks performed even more poorly [than other types of firm]’ when it came to clarity of charging, echoed in the findings of our research. This may be interpreted as an indication that execution-only brokers have an opportunity to get ahead, compared to other firms in the wealth sector.
RDR impacts so far
In January 2013 RDR introduced a change in pricing mechanisms which meant that financial advisers no longer received a commission when clients purchased a regulated product. Arguably, the previous arrangement encouraged IFAs to recommend products and services from which they stood to gain. This led to a change in charging structure towards more explicit advice fees, which in turn led to a drop in customers seeking financial advice.
These developments paved the way for execution-only brokers to target a consumer base that is interested in investment products and not overly concerned with IFA fees. Assets under administration of execution-only brokers rose by over 35% between 2012 and 2013, according to Compeer research.
Execution-only broker beware
Having introduced changes to pricing mechanisms in other wealth management contexts, the FCA has turned its attention to execution only brokers. The FCA has launched a thematic review into execution-only brokers that will focus on ‘guided investment advice’. As part of this review, firms have been asked about their procedure for creating product lists and investment research for clients. The parallel with commission-based charging for financial advice is apparent: it seems that the FCA is concerned that ‘best buy’ lists allow firms to give advice by the back door. This means that they can sidestep RDR rules aimed at preventing financial advisers from promoting high-commission products. Execution-only brokers should be proactive and disclose their sources and compilation data to customers. Additionally, they should take away the broader message of TR 14/6 and make clear to their customers what the broker will pay and what the customers are paying for.
Transparency of investment recommendations
As a first step towards achieving the FCA’s previously stated aims, execution-only brokers should make clear that directed correspondence, which includes investment advice, is not tailored. The FCA’s guidance indicates that ‘Information may take on the nature of advice if the circumstances in which it is provided give it the force of a recommendation’. In order to steer clear of the suggestion that they are providing advice, execution-only brokers will distribute investment recommendations only through methods available to all customers. In practice, this may mean restricting best-buy lists to the public website available to all while at the same time completely avoiding terms that imply that the recommendations are tailored. This is because the FCA reasons that regulation around advice should be influenced by the customer’s perception rather than the provider’s. Execution-only brokers should find ways of limiting the customer’s opportunity to make this interpretation.
Clarity of charges and service provided
A key point from TR 14/6 was that ‘a high proportion of firms are failing to correctly disclose to clients the cost of their advice, the type of service they offer, and the nature of the ongoing service they provide’. They highlight the lack of personalisation of charges: a customer should understand the pounds and pence value of the charges and be aware of what the charges could turn into, thus improving the customer’s ability to self-educate. As execution-only brokers target the retail, mass-affluent segment, they should reflect upon the way in which costs for similar services are presented. Retail investors would resent it if holiday providers, for example, showed percentage fees as opposed to the sterling value. Presentation should be no different when it comes to financial services and products. This could take the form of tools that illustrate how much a service costs based upon the amount invested, like a simple calculator.
To sum up, the FCA’s key objectives are: making explicit what service customers should expect and presenting a real, digestible, personalised charge for this service. Now is the time for execution-only brokers to implement these objectives and capitalise on their potential lead.
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