Transparency, as a description of advice delivery, is being used more and more by firms involved in financial advice. However, what does transparency mean?
While we have been banging on about transparency for years (since 2008), is our interpretation different from others?
Transparency – Definition
According to UK regulators, transparency should :
1. Improve the clarity of the services provided to a client by an adviser
2. Prevent adviser remuneration from distorting consumer outcomes, and
3. Allow a client to make a proper comparison of advice and services offered
without commission or fee bias.
Indeed, transparency in a business or governance context, is honesty and openness. Transparency and accountability are generally considered the two main pillars of good corporate governance. They are reflected in a good firm by detailing every aspect of charges and access of an investment or pension allowing full understanding and comparison for every client.
Non-UK Definition of Transparency
Product A and product B are recommended to a client, the client is told that wrapper fees are 1% pa for both. The commission is payable in accordance with a commission cap that is compliant and transparent. Which product offered the best value?
Unfortunately, there is insufficient information about the product costs and the likely impact of these costs that significantly reduce savings/pensions . There is no mention of the costs linked to bid/offer spreads or ongoing fund charges and, without that information, a useful comparison cannot be done.
This form of transparency may have satisfied a UK regulator in 1995, but not now.
Our definition of transparency
This has been driven, as part of a process over the last 22 years in the UK, by regulation, competition, public interest and an increasing level of professional standards.
What is transparency?
1. Agreed fees with a client before undertaking any advice which completely
removes commission bias and expresses the fees in explicit monetary terms,
2. Adviser fees not being contingent upon a client buying a product, but linked
to the client receiving the right outcome and advice – the advice may be to do
nothing at all.
3. Illustrations of the effects of those adviser fees on any investment, if those fees
are taken from an investment as remuneration
4. Soft fees.These are all the jollies and free gifts that the investment and pension
firms often provide to advisers, helping to persuade them to recommend their
products. Transparent advisers will not take these trips abroad and expensive
gifts. However, a diary once a year would be appreciated ? ( A register of gifts
should be kept by a transparent IFA )
5. The fees of the products must be disclosed, again in monetary terms. For
example the wrapper (be it an insurance bond or a platform) cannot just refer
to a percentage over a number of years, the fees must be clear.
6. Exit fees or surrender penalties. The transparent adviser will tend to
recommend investments and pensions without any exit penalties if at all
possible. (Fixed income products such as guaranteed deposits may have such
penalties). If there are penalties, they must be disclosed.
7. Fund management fees. This is a subject in itself but the investor must be
aware that there are clean funds and commission paying funds/mirror funds.
Quite often, the latter two being twice or three times the annual cost of the
clean funds. This is because commission is taken by the insurance company /
platform and does not form part of the overseas “transparent” disclosure to
the client. In the UK this part of transparency alone has led to fund costs
dropping substantially. These reduced fund costs could make a substantial
difference to a client’s overall financial well-being.
8. Agreed ongoing advisory fees, again in monetary terms, and for an agreed
service level (not once a year meetings).
RDR and transparency
Has transparency become a buzzword for firms that recognize its significance, want to jump on the bandwagon, and forget the baggage they have left behind?
While many non-UK firms refer to transparency, and the UK Retail Distribution Review, their interpretation of transparency is just about declaring some commission and a “1%“ ongoing charge. This is not transparency, this is commission disclosure which was introduced in the UK over 20 years ago.
Transparency allows clients to recognise and understand all the charges of all the working parts. This includes surrender charges, penalties, fund charges, product charges, bid/offer spreads, commissions and fees.
OpesFidelio advisers adhere to the principles of transparency for the benefit of our clients.