The impact of RDR on offshore financial advisers seems to be a topic which is debated from time to time but in my opinion the full impact of the proposals by the UK FSA are not being discussed enough within the offshore market. In the last two years we have seen more “advisers” move to the Middle East to carry on their “profession” as a financial adviser, and admitting, aside from the tax free income available in the UAE, one the driving factors is escaping the regulatory burden in the UK.
Admittedly, the UK FSA only regulate the UK domestic market. However, given the proposals cover such a wide range of changes from compliance with adviser remuneration, minimum qualification standards through to the use of investment platforms, I personally believe that when the RDR happens there could be quite an impact on the offshore market.
Remuneration
Adviser remuneration is an interesting one and could potentially have a greater impact on the offshore market than you would initially think. This is mainly due to how the providers may react, whilst the majority of providers in the UK are already operating “factory gate” pricing and those same providers operating in the offshore market are still paying large commissions for new business, the UK arm of these providers will need to ensure that their contracts are fully aligned with the adviser remuneration rules.
This surely presents a good opportunity for some of these providers, maybe only the smaller ones to begin with, to review whether they will continue to pay such high commissions when they are not in the UK, I think that the rule changes in the UK could lead to the providers reviewing their commission business models in the offshore market and reducing them or totally removing them, after all, many recognise that the such high commission payments are over the longer term unsustainable.
Re-evaluation of business models
Given that the majority of offshore firms operate on large initial commissions available from providers, if there is a move to reduce commissions or indeed remove them totally there could be significant impact on cash flow for many of these advisory offshore firms and they in turn would need to evaluate their own business models.
Many of the offshore advisory firms do not seem to be taking any steps to combat the potential ramifications should commissions not remain forever. In addition, it should also be borne in mind that the remuneration structure does not just impact on the wrapper; it will also impact on the commissions available from the funds, where many offshore advisers take additional ancillary commissions.
Platforms
The use of investment platforms is growing in the offshore market, albeit not at the same pace as in the UK domestic market and it is clear that the FSA has some clear views (not necessarily all right!) about the use of platforms in the UK market. As we see the offshore market continue to expand I suspect we will see a greater use of platforms, which I don’t necessarily disagree with, however, the use of platforms must be in the best interest of and the most suitable solution for the client rather than the adviser.
Couple the spotlight which platforms are under, with the additional consultation paper issued very recently by the UK FSA on the use of risk profiling tools in the advice process; it would appear that there is a wider motive of the FSA to influence how investment advice is delivered to the end client.
I found it interesting that they are quoted as saying “The high number of unsuitable investment selections we see in the pensions and investment markets is still a significant concern”, this is in the UK market, which in my opinion the majority of advisers follow a fairly robust process and have the knowledge to deliver the advice.
Conversely, the investment selection and advice in the offshore market continues to worry me. The majority of advisers have little investment knowledge and experience and often recommend funds that either pay the highest commission and/or were the top performing funds in the previous 12 months. At Killik we often come across clients that have investment portfolios that are wholly unsuitable to both their requirements and, importantly, attitude to investment risk. Many of these portfolios often also contain a high element of structured products, which is a whole separate topic in its own right.
Ramifications on perception of offshore advisers
Finally, the increase in the minimum qualification standards in the UK to diploma level and the greater regulation, are in my opinion very welcome, however the knock on impact this could have on the offshore market does worry me.
In the last two years we have seen more “advisers” move to the Middle East to carry on their “profession” as a financial adviser, and admitting, aside from the tax free income available in the UAE, one the driving factors is escaping the regulatory burden in the UK. The numbers of advisers looking to operate in less regulated offshore markets is likely to increase substantially, potentially continuing to tarnish the reputation of those of us that believe in qualifications and carrying out business in a professional manner.
The impact of RDR on the offshore market debate will no doubt continue to rumble on over coming months but my view is more businesses should be considering what the impact could be for them.
International Adviser :: Don't underestimate offshore impact of RDR
Added 11 January 2011 by Sarah Lord, Chartered Financial Planner, Killik & Co, Dubai