U.K. Advisors Adapt to Life After Commissions
Two years have passed since sweeping regulatory changes for the U.K’s advisory industry started taking effect. Known as the Retail Distribution Review, or RDR, the changes have eliminated most commission-based compensation, imposed additional requirements for fee transparency and training, and forced advisors to take clients’ potential risks into account when making recommendations.
For the British, RDR’s consequences have been dramatic. Advisor headcount has shrunk by about 25%, according to Robin Stoakley, who leads U.K. retail distribution for London-based asset manager Schroders. Yet a majority of those who remain in the profession have good things to say about the new regime, adds Stoakley, whose job includes overseeing Schroders’ annual survey of U.K. advisors. In the December 2014 edition, 56% of the 600-plus responding advisors said RDR has improved fee clarity and increased professionalism in the industry.
“The advisors that have stayed have adapted their business models,” Stoakley says. “They are doing OK, and they are happy as we are to see the cowboys out of business.”
Because RDR hasn’t caused the sky to fall in Britain, it may encourage reform advocates in the U.S. Up until now, Washington regulators haven’t proposed eliminating commissions entirely, and most analysts don’t expect them to. Even in the U.K., RDR does not completely ban commissions, which British advisors can still earn on products like insurance. Rather, the legislation allows British FAs to charge clients only predisclosed fees for advice. And those who recommend products based on suitability must consider a client’s ability to withstand possible losses in light of his or her broad financial circumstances. To some, this brings to mind U.S. calls for a universal fiduciary standard for advisors that doesn’t except those in the securities-brokerage channel, as the standard now does.
But RDR-like legislation doesn’t stand a chance against America’s powerful broker-dealer industry, according to Brent Everett, chief investment officer at Talis Advisors, an RIA in Plano, Texas, with $200 million under management. “The British system helps the case for a universal fiduciary standard, but it doesn’t trump the strength of the broker-dealers,” he says. Besides that, Everett — himself a fiduciary — believes the patchwork system of regulations in the U.S., as well as a fiercer litigation environment here, limits the relevance of the U.K. experience for FAs this side of the Atlantic.
Glen Barrentine, a securities lawyer with international law firm Winston & Strawn in New York, says even a watered-down fiduciary requirement for U.S. brokers could be “a nose in the tent” for more substantial reform, including a ban on commissions. On the other hand, Barrentine says this thin-end-of-the-wedge view of reform is precisely what inspires brokerage-industry associations to oppose any change to the status quo. In February, when the U.S. Department of Labor suggested imposing the fiduciary standard on retirement-account advisors, Kenneth Bentsen Jr., CEO of Sifma, a brokerage-industry lobby group, said the proposal “has the potential to cause a detrimental impact on all American savers and the retirement system as a whole.”
As for life in the aftermath of actual reform, Schroders’ Stoakley says U.K. clients and advisors have adjusted to RDR, though not without fallout. With so much fee transparency, large clients aren’t willing to keep subsidizing smaller clients, he says. About a fifth of the advisors responding to Schroders’ latest survey reported dropping clients with less than 50,000 pounds sterling (currently about $74,000) to invest. Some U.K. advisors are making more use of low-cost products like index funds, so they can take on clients with small portfolios and still make money, according to Stoakley.
Steve Gazzard, CEO of the London-based Institute of Financial Planning, a trade organization for planners that supported RDR, says the legislation is meant to prompt “remuneration arrangements that allow competitive forces to work in favor of consumers” and establish “standards of professionalism that inspire consumer confidence and build trust.” Initially, he says, the changes have led “to a very confused marketplace.” Ultimately, though, as clients come to understand that commission-driven transactions and unbiased counsel don’t often coincide, he thinks the new compensation transparency will inspire greater client loyalty.
Even when cast in its most favorable light, though, the U.K. legislation deals advocates of stiffer U.S. regulation but a weak hand against the brokerage industry, in the opinion of Talis Advisors’ Everett. He and Barrentine both cite the big firms’ clout with Congress. “I seriously doubt any end to commissions,” says Everett. “That’s entrenched.”