Unintended Consequences of RDR
Yesterday’s publication of the Association of British Insurers’ paper on Simplified Advice, published in conjunction with Charles River Associates’ research into the costs of providing comprehensive advice, deserves to be taken seriously.
IFAs who are quick to criticise the record of insurers and banks at matching product solutions to client needs do usually also concede that the changes in the RDR aimed at reducing bias and improving standards will cut across the other RDR objective of increasing access to advice. As the ABI paper suggests, RDR is perversely increasing the advice gap and it has been left to the industry to come up with proposals to plug it.
The CRA costs paper suggests that the bank channel, which of the existing models is closest to new Simplified Advice processes, has average costs per successful sale to a new customer (combining time, salary and overhead differences) across pensions, investment and protection products of just over £200 compared with just under £600 for all IFA channels (p46). The ABI sees IT and standardisation of processes as the key to the existing lower-cost delivery in the bank channel. This is also the basis of its Simplified Advice proposals, combining technology with multi-media guidance using what it calls ‘facilitators’.
I am a great believer in technology as the key enabler in improving access and reducing costs. This holds whether the computer-based applications are viewed on screen at home or in a branch, with or without telephone support. Since I first got involved in web-based financial planning and investment decision tools in the late 1990s, use of the internet as a source of financial information has grown exponentially and the cost of technology has fallen, supporting greater sophistication both under the bonnet and in the visible front end.
For a critic of the industry’s technical skills I am counter-factually totally unimpressed by the economics of increasing skills to Level 4 at all points of interaction between the public and the industry. The ABI is also right on this one. I have never seen evidence that this will alter the incidence of bad advice. However, distributed skills via technology could raise the quality of advice to the best available and that is a lot higher than the best possible across some thirty thousand retrained people.
I am conscious banks will hardly look like the right role model for systematic processes, given their appalling record of misselling. But the record reflects two sources of implementation error. First, the design of the decision processes themselves is flawed (evident, for instance, when I investigated Lloyds TSB’s internal procedures). Second, with the best will in the world how staff actually apply them is compromised by brutalist sales incentives, which could be halted instantly if boards of directors were so minded.
The ABI paper deals with the challenge of an economic cap on what consumers will pay for advice. Perhaps because it wishes to move on, it does not make too much of the fact that RDR has largely created that problem. Unbundling makes a move to cost-based rather than value-based charges almost inevitable. It therefore threatens to halt the subsidy by wealthier customers that has kept small customers in the game. The law of unintended consequences could have been written specially for regulators.