Viewpoint_Issue_3

Keeping you connected to today’s UK financial services market

Welcome to the third edition ofviewpoint, Harris Interactive’sUK financial services newsletter.

In this edition we take a look at theRetail Distribution Review focusing onthe need for regulation, the changescoming into force and the implicationsand challenges being faced by theindustry.

We hope you find this newsletter informative and useful. If you wish tofind out more about the work we dowithin the financial services industryplease get in touch.

Frances Green: Financial Services Director

Peter Shreeve: Senior Consultant Financial Services Research

In 2006 the FSA announced it wasto review how financial advice issought and paid for - since then ithas become somewhat of a ‘hottopic’ within the industry.

The need for regulation

Historically, when focusing oninvestments and advice, somewithin the industry have treatedcustomers quite poorly.

Consumers have suffered from themis-selling of personal pensions,endowment mortgages, highincome bonds as well as thecollapse of both Equitable Life and

Barings Bank amongst others. Withlittle or no protection from thegovernment, consumers have beenleft to their own devices and havehad to pick themselves up, dustthemselves down and start again.

We cannot therefore be surprisedthat when consumers seek professional advice today, theyhave a number of concerns thatprimarily focus on the safety andsecurity of their investments,adviser self interest (commissionlevels) as well as the return theycan expect to receive.

Retail Distribution Review (RDR)

For more information on our financial services research practice visit:| www.harrisinteractive.co.uk PAGE 1

ISSUE 3 - October 2010

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The RDR &the need for regulation

Pages 1-2

Safety and security of investment

No concerns

Advice, adviser to be independent

Knowledge, qualifications of adviser

Being advised correctly (best correct, right advice)

State of economy / financial institutions

Honesty, trustworthiness of advisers

Interest rate

Return on investment

Advice / product tailored to meet needs

Adviser self interest (commission payments)

17

4

5

5

5

7

7

8

10

10

2015

2

1

7

1

2

16

7

3

10

17

Bank, Building Society User

IFA User

% of respondents403020100

Source: Harris Poll Omnibus, August 2010, Main sourceof advice (IFA – 235, Bank or Building society -288)

Challengesahead &

join our RDRSyndicate

Page 5

Q. When seeking professional advice for savings, investments and pension products what concerns, if any, do you/would you have?

Continued on page 2...

Separationof advicecharges

Page 3

Changes coming into

force

Page 2

Improving standards ofadvisers and

servicesPage 4

Issue 3 | October 2010

For more information on our financial services research practice visit: www.harrisinteractive.co.uk | PAGE 2

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How much do you trust the advice given by...Some Alot A great deal

Doctors (GPs)

Nurses

Solicitors

Chartered Accountants

Tradesman (e.g.mechanic, electrician)

IFAs

Bank/building society advisers

Estate agents

Source: Harris Poll Omnibus, August 2010, All respondents n=1980

% of respondents

25

88

902738

26 44 18

35 27

291226

5521241

5641438

5721045

6061638

708

100806040200

Consumer concerns have beenperpetuated by the sector’s previous‘indiscretions’ which have erodedconsumer trust and confidencewithin the sector.

Given recent history and the rangeof concerns held, it is not surprisingthat only 56% of the UK populationhave some trust in the advice givenby IFAs, bringing them above onlybank/building society advisers andestate agents.

Currently, financial advice is generally paid for on a commissionbasis. Additionally, fees and productcharges have a tendency to bebundled together and lack transparency. Hence, consumers areunlikely to know what they arepaying, nor attach any intrinsic value

to the advice they are given.Concerns were also raised regardingthe impartiality of financial adviserswhen recommending products.

It is clear something had to be doneto restore faith in the advice beingreceived and the industry as awhole.

Continued from page 1...

Changes coming into force

The 2006 FSA review highlighted anumber of issues that impact on theperceived quality of advice and uponactual purchase outcomes, whichthey feel has led to falling levels oftrust and confidence within the UKinvestment market.

There was a perception that someadvisers may be biased towardsproducts or providers that offeredhigher levels of commission.Consequently, consumers werebeing sold products which may notfully meet their needs.

The review has led the FSA to makeregulatory changes to address the‘root cause’ of these problems andto re-enforce and build upon theirnotion of treating customers fairly torestore trust.

Coming into effect at the end of2012, these changes will impact allregulated organisations involved inproducing or distributing retailinvestment products and services,from banks to building societies,insurers to wealth managers andfinancial advisers.

However, re-building trust in theinvestment market is not an easyfeat, considering the general negativity the financial servicesindustry as a whole has experienced over the past 18months.

Whilst the benefits and end goalfrom the reforms is clear, there is amountain to climb in terms of bothawareness and education amongstconsumers. A number of studies

conducted by Harris Interactive haveshown a lack of awareness amongsteven the most sophisticated ofinvestors regarding how much theycurrently pay for advice and a totallack of understanding of the different parties involved and theirrole.

Improving theclarity with

which advisersdescribe their

services

Separation ofproduct andprefessional

advice charges

Improving professionalstandards of advisers



Separation of product andprofessional advice charges

To tackle head on the perceptionthat the commission based structurehas led to biased and inappropriateadvice, the FSA propose removingcommission and replacing this with acharging structure of up-front fees.

At first glance this does appear to bea major step forward, providinggreater transparency with a fairermodel whilst helping to instil greaterlevels of trust and confidence in theadvice being given and the widerindustry.

However, proposing to discloseactual adviser fees upfront willrequire a major shift in the mind-setof the consumer, as well as exposingthem to a level of detail to whichthey are not accustomed. I amcertainly looking forward to seeingthe different approaches marketersuse to address this challenge.

A recent survey conducted by theABI found that an existing full advisory service typically costs £670and on average takes around 7 hours40 minutes which includes all clientmeetings, research and preparingrecommendations and post-salesadministration.

As a result of the current bundledcharges approach, this cost foradvice and associated time will exceed expectations for many.

The same ABI report has also calculated that on averageconsumers with less than £257 permonth to save or £13,730 to investas a lump sum cannot be economically served by full advice.

Therefore, if a much less timeconsuming advisory process can notbe agreed, such as simplified advice,many consumers will either choosenot to seek professional advice at allor be unable to afford to. Thisincreases the risk of greater mis-selling due to the lack of accessto advice, defeating one of themajor aims of the RDR.

Although in principle I support whatthe FSA are doing, I am concernedthat financial advice may become atwo-tiered system, one for thosewho can afford full ‘independent’advice and one for those whocannot. High street bank CEO’s mustbe laughing all the way to their bankas the review plays straight into theirhands.

Money Made Clear, will be an invaluable source of help for many,providing free impartial financialadvice for those who are aware ofthe service. However it will not goto the next stage and make a product recommendation leavingthose most at need with nowhere toturn.

A question I have to ask is, hasanyone taken on board whatconsumers want? From our surveyless than a third of those who seekprofessional advice when buyinginvestment products prefer to payan upfront fee. From focus groups Ihave witnessed, whilst manywelcome the high level of transparency the RDR brings, someconsumers have actually said theywould prefer to remain ignorant ofthe system and carry on regardless.Obviously, that would not be treating them fairly but an alternative solution must be foundthat at the very least negates theneed for fees to be paid upfront anddoes not punish them for doing so.

How would you prefer to pay when seeking professionaladvice for investment products?

Company I invest with pays adviser commission

I would prefer to pay a separate flat feedirectly to adviser

Other

I would prefer to pay an hourly fee directlyto adviser

Not sure

Source: Harris Poll Omnibus, August 2010,Those who seek professional advice n=914

30

6

1914

31

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Continued on page 5...

Thinking about the different qualifications people take to perform their role, which of thefollowing professions, if any, do you think are sufficiently qualified?

Doctors (GPs)

Nurses

Solicitors

Chartered accountants

Tradesman (e.g.car mechanic, electrician)

IFAs

Bank/building society advisers

Estate agents

None of these

81

72

67

50

35

21

16

9

11

0 10080604020% of respondents

Source: Harris Poll Omnibus, August2010, All respondents n=1980

Improving professional standards of advisers

The introduction by the FSA of a newentry level adviser qualification aswell as enhanced standards forprofessional development and an overarching code of ethics, will go along way to improve currentconsumer perceptions.

Looking at the results of our ownsurvey, this is an area where theindustry clearly needs to build greater levels of trust and confidence. Only 21% of the UK population perceive IFAs as sufficiently qualified to perform theirrole, falling some way below other professions. Driving up professional standards has also been welcomedby advisers.

A recent survey conducted for theChartered Insurance Institute and Personal Finance Society amongst a

range of financial advisers found 61%agree that the RDR will lead to a more professional financial services market. From the same survey, asimilar proportion also think better qualified advisers are able to delivera higher quality level of advice. It isthe interaction between consumers and financial advisers which providesan opportunity to help instil greaterfinancial capability and discipline, supporting another FSA initiative.

Improving the clarity withwhich advisers describetheir services

Tying in with the requirement fortransparency, post 2012 financial advisers will also have to be clear onthe type of advice they are providingby distinguishing between whether the advice is independent, restricted or tied. When asked, consumersalways state they want the advicethey receive to be independent,

something which will put many financial institutions in a bit of a dilemma. What type of adviceshould we offer? Will consumers bewilling to pay for it?

Personally, I don’t think allconsumers will either need or bewilling to pay for ‘truly’ independent advice, as this will leadto higher adviser fees as a result ofhaving to conduct more research.Though, at the very least allconsumers will want to be able tosee how the products they are beingoffered compare to the rest of themarket.

I do believe providing clarificationaround the type of advice on offerwill further help to build trust as aresult of this increased transparency,although all financial servicesmarketers will have to be careful notto confuse and potentially alienatethose who are unable to pay for afull advisory service.

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For further information related to this article, such as the background data, or to suggest new topics for inclusion please email [email protected] or call +44 (0)161 615 2300

The FSA also need to ensure thoseadvisers who offer an independentservice are monitored in a waywhich is appropriate but not restrictive and ensures this is nottreated as a mere ‘tick box’ exercise.

The challenges ahead

So, where does all this leaveproviders, financial advisers andmore importantly, consumers?

For advisers, being more transparentwith regards to their charges couldprice many out of the market. Therecent Chartered Insurance Instituteand Personal Finance Society surveyestimates approx. 10% of adviserswill leave the market post RDR.

For those who do stay, they willneed to ensure they have gained

their required qualification as well asbe clear on their independent orrestricted advisory stance.

Obtaining independent advice maybe a concern for consumers now,but who will be willing to pay for itin the future? IFAs are more likely totarget the more affluent marketpresenting an opportunity for otherfinancial institutions such as banks,which have the networks in place tobe accessible to consumers.

However their advice offering willneed to be cost effective in order tocombat both consumers’ affordability and reticence to pay.

There is also a need to educateconsumers around the process ofhow investment purchases work andI believe the responsibility not only

lies in the hands of the FSA, butproviders and IFAs as well. This canbe done through the industrycoming together and communicatingwith consumers to increase awareness and understanding of thechanges and benefits the RDRbrings. This would also provide aunique opportunity for the industryto promote itself and improve itsreputation to help re-build trust inthe investment market.

This article wasresearched andwritten byFarzana Badar,Senior ResearchManager,Financial ServicesResearch Team.

Continued from page 4...

To share the latest thoughts andoptions of financial servicesteam, visit our pages at:

www.harrisinteractive.co.uk

Here you will find recent casestudies, visit our blog, post yourcomments, download recentreports, and access the archiveof viewpoint newsletters.

Join our RDR Investor Syndicate

Harris Interactive invites you to participate in our new InvestorSyndicate focusing on the Retail Distribution Review.

The syndicate offers a cost-effective way of regularly monitoringinvestor awareness and attitudes towards the changes proposed bythe RDR, likelihood to use advice when taking out investment products and with what level of advice. Our first wave is currentlyin field.

For further details, contact:Frances Green: [email protected] or Michael Worledge: [email protected]

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