Staying on track for the Retail Distribution Review 0

Authored by Chuka Madukwe

Why is this important? Why is it happening?

The retail investment market has been a lucrative space for many years, however over the last decade it has had its fair share of scandals. The key area of concern currently under scrutiny is the delivery of financial advice and the subsequent sale of financial products. With the current approach, financial advisors receive commissions on products provided to clients – a framework that can introduce a bias to the financial advice which is given. Product providers that offer advisors attractive commissions get favoured, very often steering advisors away from keeping clients’ interests at heart.

This commission based approach has often resulted in partial recommendations being made while fees that are paid to advisors are not quite transparent. Public trust and consumer confidence has deteriorated significantly bringing disrepute and stagnation to this market space.

What is the mandate?

The new industry-wide legislation, the Retail Distribution Review (RDR), is being driven by the FCA. Its core tenets are to raise the professional standards of firms that dispense advice, reduce conflict of interests around remuneration and to encourage transparency and disclosure of the types of services being provided and paid for by a client. The RDR was finalised on 31 December 2012 and has the following implications from 2013 onwards:

• Adherence to a code of ethics and professional standards: One of the core requirements is that advisors are expected to hold appropriate qualifications and a Statement of Professional Standing from an accredited body. The FCA will maintain and enforce these standards.


•  Transparency in advisor remuneration: A set of rules will be established to help increase consumer confidence that the advice received is not biased by commission. The consumer and the advisor will agree on a fee and it will not be determined by a financial product provider. Advisors and wealth managers are expected to have a charging structure with applicable fees/charges (based on the type of service offered) to be disclosed to clients upfront. Charges can be hourly, fixed or dependent on certain levels of service.


•  Independent advice that is fair, clear and comprehensive. The assessment of a variety of investment options should be made distinct from Restricted Advice which is tailored towards a limited set of product providers.  The intent of this requirement is to ensure that advice is genuinely independent with sufficient rigor and clients are clearly notified about the nature of the advice being given.

What are the implications?

It is a brave new world for IFAs, Advisory Wealth Managers and Bancassurance. RDR cuts through the business model with an impact ranging from market positioning to technology deployment.

The key considerations which need to be made are highlighted as follows:

•  There is greater competitive pressure on margins as a result of the expected transparency of fee structures. Wealth managers and IFAs can approach this challenge by revisiting their client segmentation strategy. CRM systems will become a strategic tool to support the initial and on-going partitioning and prioritisation of a client base using internal and external data. This will help inform the charging mechanisms that will be devised to suit target client profiles.


•  A pressing need exists to demonstrate that fees are directly mapped to service levels as opposed to a blanket annual remuneration for services rendered.


•  For those going the independent route, they will need to maintain knowledge of a broad scope of products and a product catalogue. This will need to reflect the most up-to-date offerings.


•  There is concern that the market is not ready to migrate to a fee-based advice world as opposed to the ‘free’ model driven by commissions. Robust processes that support high service levels and client intimacy are critical here.


•  There will be an increase in cost and complexity of compliance. This will be as a result of training, acquisition of qualifications, accreditation and reporting requirements. Smaller IFAs might struggle to continue within the market forcing them to exit or merge with others.


•  Adjusting the business’ operating model to introduce efficiencies that take advantage of the post-RDR environment is inescapable. Future supporting processes and technologies will need to be understood and the appropriate projects kicked off. Once a future operating model has been clearly identified, the appropriate range of technologies can be examined and acquired as necessary.

Does it present any opportunities?

The on-going commentary within RDR has largely focused on the flaws and its undesirable impact. Of course this is natural for any form of widespread change. At BSG we try to steer attention to what benefits can be reaped and maximised in the midst of change while looking for a win-win outcome. Lets’ consider the following:

• Service optimization and outsourcing. It’s important for firms to understand where they offer added value. Once this core business area has been identified a business can outsource less critical aspects. For example an IFA can choose to outsource money management and the investment process in order to own and manage client relationships with high service levels that are innovative and intimate. 
• Rise of technologies that drive lower-touch high-quality advice. New technology developments hold out realistic opportunities to streamline even the most complex advice processes and promote greater self-selection by clients. ‘Real time’ internet interactions, instant messaging and face-to-face online alternatives can be used to remove the need for direct contact. At the same time, clients are increasingly willing to use powerful online servicing tools to self-manage their own holdings (whereas they would previously have referred these changes to their advisor). 
•  Increased trust and willingness to pay. Improved perception of the industry and the quality of the advice being given can potentially attract increased up-front fees akin to the legal and accounting sector which would allow players to maximise profits.