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RDR Update Script Slide 1 Hello and welcome to this short film. My name is John Batten, and over the next few minutes I will pull together some of the key RDR changes which impact on the advice process, and the products we recommend to our clients. I will look at how the way we disclose fees and charges to clients has been affected, and also how those fees and charges work at a product level. Slide 2 We will begin with a look at what’s described as the ‘initial disclosure’ to a client. In simple terms we are talking about the stage in the advice process where the you, the Partner, explains to the client the range of services you provide, and the costs of those services. Within its conduct of business rules the regulator requires all firms offering financial services, to provide information to retail clients about the firm, about its services and about its remuneration. This detail ranges from simple facts, such as the name and address of the regulated firm and Financial Services Compensation Scheme cover for example, through to the adviser charging structure. St. James’s Place meets these disclosure requirements through provision of a ‘Key facts about our services and costs’ document, which we refer to as the Services and Costs Disclosure Document’ or SCDD for short, and through providing associated terms of business. Slide 3 The regulator requires that disclosure must take place in good time before any business is carried out, and it is expected therefore that the SCDD would be provided and explained at the beginning of the first meeting with a client. You are not required to re-present this information at every subsequent meeting with the same client unless any of that information has changed since the first meeting. As the SCDD was updated on 31 December 2012, to reflect the RDR changes, any client seen after this date, even if they are an existing client, should be provided with the revised version of the SCDD. As commission was replaced with ‘adviser charges’ from this date, you should also ensure that the client is aware of the advice charges in place, and you should ensure those charges are discussed and agreed before finalising any recommendation. Slide 4 Part of the advice charges to which the client is agreeing is the ‘on-going advice charge’. This is the 0.5% charge that the client pays for your on-going services like reviewing their investments for example, or checking that on-going contribution levels remain appropriate for the client. The client has the right to decline your on-going servicing and to therefore turn off the on-going advice charge - this is also disclosed in the SCDD. All clients should be encouraged to read and retain the SCDD.
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Slide 5 St. James’s Place has chosen to pay advice charges from within the products that Partners recommend, rather than the adviser being paid directly by the retail client. This is the case whether a St. James’s Place product or one of our third party provider’s products is recommended. RDR regulations require the product provider to obtain and validate instructions from the client that agree this is how they want the advice charges paid. It is worth noting that it is advice charges that have to be disclosed, not the advice fee that is actually paid by St. James’s Place to Partners. Slide 6 Declarations on application forms and the client registration form for Electronic Business Submission confirm that the client has agreed to the facilitation of the charges set out in the SCDD. Slide 7 The SCDD also covers the breadth of a firm’s advice service for investment products and it must be explained whether that advice will be independent or restricted which is the latter in the case of St. James’s Place. For firms that offer face-to-face advice this must be supported by a verbal explanation that the advice is restricted and the nature of that restriction. One example of the type of statement that you will need to make might be: ‘As a Partner of St. James’s Place, my advice is restricted to those products and services that have been carefully selected and approved by St. James’s Place and consequently is guaranteed by them’. Slide 8 Because we both manufacture and distribute products to clients St. James’s Place is described as a ‘vertically integrated business’ and that means we offer clients a fully integrated service comprising both individual tailored advice, and our approach to investment management. Our charges cover the costs of this and all other aspects of a client’s dealings with us. Because we are vertically integrated, the cost of advice along with the other costs of doing business, such as the costs of our services and those of the fund managers, are included in the charges the client pays and are not an additional amount. Our advice is not free. The cost of our advice, both the initial advice we provide to clients and our on-going advice and service, is paid for from the overall charges which clients pay. We are required to separately identify the cost of the advice and inform clients what this is, and we do this in the ‘Key facts about our services and costs’ document, as well as in the personalised illustration. The initial cost of our advice is 4.5%, irrespective of the product the client has been recommended. This would only payable however if the client decides to take up a recommendation and invests in a St. James’s Place or panel product. As we point out in the illustration and ‘Key facts about our services and costs’ document the 4.5% covers all of the costs incurred in providing, checking and guaranteeing the advice. The Page | 2
remuneration of the Partner is only one element of this cost, from which they meet their own business expenses. As I mentioned a moment ago, the cost of the client’s on-going advice and servicing is 0.5% a year of the client’s Fund Value, and this amount is lower for retirement contracts. An additional percentage of regular contributions is also charged once the Initial Advice Charge has been paid. Slide 9 Where clients are investing on a regular contribution basis, the initial cost of advice is deducted in the early years from within the plan charges. With a retirement plan for example we would calculate the initial advice charge based on the first 5 years contributions. Should the client cease contributions however, they would not be liable for any initial advice charge in respect of any contributions that will not now be made. After the initial advice charge period ends, the ongoing advice charge then includes a percentage of regular contributions. The details for Retirement plan and ISA are shown here. Slide 10 The illustration contains a section titled ‘Allocation of contributions to units and deductions’. That section of the illustration gives full details of all the charges applied to the investment. These charges are all the charges the client pays. Slide 11 There is no direct link between these charges and any particular aspect of our services. The charges are payable as a whole, to cover the whole of the advice and investment. This explains how we can have an initial cost of advice of 4.5% and yet not have an initial charge on our bond and pension products. On the day the client invests in one of these products St. James’s Place can be confident of receiving charges sufficient to cover the initial advice cost of 4.5%, either through the annual charges, or the Early Withdrawal Charge - or possibly a combination of the two. As a result we can facilitate the payment of the initial advice charge and so there is no need for us to make an explicit deduction from the investment in respect of the initial advice cost. Slide 12 If we look briefly at an example using the SJP Investment Bond, here is how the charges are applied. Firstly 100% of the client’s investment is allocated to units on day one of their investment. There is a 1.5% annual management charge and an external manager charge of somewhere around 0.6% - depending on the funds the client is invested in. These charges are levied through a daily adjustment to the fund price. If the client encashes early, then the early withdrawal charge will also apply, to recoup any outstanding charges not yet received. Page | 3
Slide 13 St. James’s Place then facilitates the payment of the initial and ongoing advice charges from these plan charges you are already familiar with. So again, hopefully this explains how we can have an initial cost of advice of 4.5% and yet not have an initial charge on our bond and pension products. Slide 14 Next I would like to briefly consider some changes to the retirement plan illustration. Slide 15 The effect of deductions has been replaced. In this section, we are going to look at the last 2 columns within the revised illustration. These columns illustrate projected transfer values for a client, and show the effect of charges on the transfer value the client may receive should they decide to move the plan elsewhere. The first column details the transfer value if only our product charges are taken, and the second details the transfer value after all charges are taken. Slide 16 If we consider these columns briefly, we can explore the implications of the change. Both these columns detail the transfer value a client may receive assuming growth at the mid-rate, and both columns include the costs of managing and administering the plan. Slide 17 The first column calculates what the client might receive as a transfer value – had there been no advice costs attached to the plan. In other words, no 4.5% initial advice charge or 0.25% on-going advice charge. Naturally if there were no advice costs, the charges within the plan could be lower, and the impact for the client would be a greater return. Slide 18 The second column, which is actually the same as the old ‘what you might get back’ column, includes the cost of advice, enabling the client to see in monetary terms the impact of paying for your advice over the term of the plan. The difference between the figures in column one and column two is therefore, the effect of the advice costs on the clients return. Of course, it is worth noting, we didn’t actually deduct that amount from the client’s plan. The difference reflects the loss of growth on the charges taken over the plan’s lifetime. Page | 4
Slide 19 So, as I have mentioned SJP facilitate the payment of the advice costs from charges taken, rather than charging them separately to the client. This has a significant advantage for pension clients. Taking the advice costs from the Retirement Plan means that those costs are deducted after tax relief has been received on the pension contribution. If the client were to pay the same amount by cheque this would come from their net income and therefore no tax relief would be available. This is the main reason why stakeholder pensions are less attractive than before RDR as the stakeholder rules specifically prevent advice charges being facilitated from within the pension itself. Slide 20 There is no tax impact of deducting advice costs from unit trust or ISA investments as there is no distribution or unit disposal taking place. Charges are reflected through a daily adjustment in the unit price. Slide 21 The situation is a little more complex however for investment bonds. The tax rules governing the treatment of life assurance based investments such as the bond are different to those governing unit trust and ISA investments. As we have seen St. James’s Place facilitates the payment of the advice costs from the charges taken on the investment. HMRC however view the cost of the advice as something clients pay from their investment. As a consequence HMRC deem that the advice cost is to be treated, for tax purposes, in the same way as a withdrawal from the bond. As a result the 4.5% cost of the initial advice is treated as using part of the 5% tax deferred cumulative allowance in the first year, and the 0.5% of the fund value paid for on-going advice in subsequent years is also deemed to have used some of the 5% cumulative allowance. It’s important to understand however that these figures are only used for tax purposes. They do not impact on the charges clients pay, which we looked at earlier and are set out in the personalised illustration. While the product is treated as though a 4.5% withdrawal is made in year 1, the client does not have this charge deducted from their bond. In the onshore bond example we looked at, we saw that the fund would only be subject to the Annual Management Charge of 1.5% plus any fund manager charges. Slide 22 The way that HMRC views the deduction of charges from a bond as a withdrawal has some important planning consequences. Before we look a little further at the detail here, it’s worth noting that these changes specifically affect post-RDR bond business. Existing investments held in pre-RDR bonds will remain under the pre-RDR rules – only a new element added as a top up would fall under the new regime, or a completely new bond investment.
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The first point to note is that the 5% tax deferred withdrawal allowance is 5% of the original investment amount, whereas the 0.5% On-going Advice Charge is a percentage of the fund value so with strong fund performance the On-going Advice Charge will use an increasing proportion of the 5% allowance. This is why our advice guidance suggests taking income of no more than 4% of the initial investment if chargeable events would be an issue for the client. Slide 23 The second point is that the 4.5% Initial Advice Charge uses up the majority of the first year’s 5% cumulative allowance and, again if a chargeable event would be an issue for the client, any capital needed in the first year, that might previously have been withdrawn from the bond should be set aside before the investment is made. Slide 24 It is worth noting that even if withdrawals are not being made while the bond is invested the advice charges will still impact on the taxable gain that is reported when the bond is ultimately encashed. The gain will be the final value of the bond plus the advice charges deemed to have been withdrawn minus the initial amount invested. Slide 25 These changes to bond planning make it more important than ever to ensure that we are carefully assessing a client’s need for income. The levels of income taken from a bond should be carefully tailored to meet an individual client’s needs. Where a client selects distribution funds on a new bond, the distributions should not be withdrawn in the first year – again to avoid exceeding the 5% cumulative allowance. The date from which distributions are paid out from the bond can be specified on the application form. Slide 26 Top up investments for bond clients who hold distribution funds also require careful consideration. It is likely that the top up should be invested in non-distribution funds to avoid taking more than 5% in that year. An ‘Automatic fund transfer form’ can be completed at the time of the top up investment in order that the funds are switched to distribution funds after the anniversary of the original plan. Finally, it is worth remembering that if the client remains a basic rate taxpayer, even after exceeding the 5% allowance then the top up can be invested in distribution funds, and the distributions paid, without a further tax liability. Slide 27 So, that concludes our brief look at some of the impacts of RDR on the advice process and our products. I hope you have found it useful.
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If you have any queries relating to the advice process, or anything else covered here, you may well find the answer in the RDR Briefing Notes available on the SJP Intranet. They can be located under RDR support on the right hand side of the homepage. Any further queries should be directed to your local management team in the first instance. Thanks very much for watching.
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