Simon Evans, Lead Consultant, RDR
RDR is coming, and as the deadline approaches, talk everywhere is of the problems and confusions it will bring. A recent survey by JP Morgan of over 200 Wealth Management firms revealed that:
- Fewer than half say they currently meet the RDR's definition of independence and can advise across the full range of retail investment products.
- 30% expect outsourcing of wealth management by IFAs to increase significantly
- 43% of wealth management firms expect the cost of implementing the RDR to be high, or very high
- Most believe the cost of RDR is to be met through reduced profit margins, lower staff remuneration, and higher client charges
There are plans by some firms to look at ways around the need to conform. There is a growing trend of UK-based IFA firms looking to use 'passporting' to benefit from the regulatory regime of a different country as RDR draws closer.
Faced with a threat of extniction after 2012, the opportunity to continue advising in the UK from a foreign base is a tempting proposition for those who are unwilling or unable to conform to the RDR's requirements.
But why not look at the positives?
Professionalism: The past 18 months have challenged traditional thinking about investing and asset allocation, diversification and correlation. Wealth managers must now be prepared to respond to clients' needs to understand, access and communicate with advisors regarding their relationship, products and services. And advisors must have sufficient information from objective sources regarding all products and services, to answer questions regarding performance and degree of risk.
The advent of RDR is prompting a structural shift in value away from old-fashioned providers, and towards the advisor as customer.
Professionalism will increase, though many do concede that the cost of qualifications will be steep and more qualified staff will expect to earn more. Dr Peter Williams, Head of Industry Development at Aegon, accepts this fact, but believes that increased professionalism within the sector is vital.
He states that:'The RDR started off with the right objectives. Two in particular stood out (for me):
(1) To increase consumers' trust and confidence, and (2) Increase the number of consumers using our (provider) goods and (adviser) services. I firmly believe that the move to Level 4 is a step in the right direction and will go a long way to achieving 1. However at the top echelons of advice, Level 6 - Chartered Financial Planner - should be seen as the real goal. All the independent research I have seen and my own academic research, points to Chartered being the level that the consumer expects. This is not to say that all advisers will want to be, or will need to be, Chartered. The future will have various levels of advice and qualification'.
Operational Efficiencies: The issue of requiring transparency, accessibility and performance by clients means IFAs will need to re-engineer their services in order to reduce costs, and may do so using fund supermarkets and wrap accounts, both of which offer real opportunities to cut operational costs.
Outsourcing: Also, more than half of wealth management firms surveyed believe outsourcing of wealth management by advisory firms will increase, with 30% believing it will increase significantly. Solicitors and Accountants outnumber IFAs 5:1, suggesting IFAs will be at an advantage in the professional connections market. 80% of Solicitors and Accountants currently refer clients to an IFA, and both these groups of professionals believe this will increase after RDR implementation. The RDR will encourage more solicitors and accountants to forge alliances with IFAs as professional standards become clearer and more aligned to their own. RDR would raise the IFA's competitiveness in these professional markets.
IFAs themselves widely acknowledge the commercial and client benefits of oursourcing. Most expect to outsource in order to access expert fund research.
Research conducted by Axa recently reveals that many consumers prefer IFA channels to Banks or Accountants, but acknowledge there is a huge difference between preference and reality. Axa believes the contrast between agreement and acceptance is a clear indication that IFAs who are helped to market to new audiences will capture market share, despite concerns about the impact of RDR.
Aviva's research meanwhile, indicates that large numbers of IFAs will leave the industry, while those who remain are likely to adopt business models to service fewer and wealthier clients. As with any dislocation, there will be winners and losers, and it is the fear of losing (in some cases the expectation of losing), that is driving most of the industry resistance to the RDR. The conclusion is similar to Axa's: Customers on the whole will be better off in terms of price, access and performance, and IFAs need help to achieve this.
At the heart of all the changes will be the need for system changes: Extra IT resources, and therefore expertise in terms of design, implementation and training will be in demand. Also, with many IFAs wondering if they will be able to afford to service their smaller clients, the solution may need to be based on technology to be cost-effective. Online support could be the focus moving forward, and wrap providers already provide an online forum to support IFAs, together with IT support and training to ensure their platform fits the IFA's business objectives.
Many wealth managers believe demand for their services will increase, partly as others exit the industry, or are forced tomerge. A number hope that the entire advice sector will adopt a GP/Specialist structure, with generalist planning outsourcing to specialist investment managers.
Certainly the impact of RDR goes beyond the issue of re-training and it's associated costs and disruptions. What will emerge at the end of the implementation process will be a professional, innovative, responsive and accountable body of IFAs, with consumer confidence and growth as their reward.
Postscript: MPs have been granted a three-hour slot for a full Parliamentary debate on the RDR. This follows on from the first half-hour RDR debate MP Harriet Baldwin, a fromer investment manager at JP Morgan, secured last month. Financial Secretary to the Treasury, Mark Hoban MP, caused anger among IFAs during that debate when he compared the current Level-3 minimum qualification for advisors to that of a McDonald's shift worker.
Ms Baldwin's office says the correspondence from IFAs 'has not stopped' since last month's debate. 'Everyday we get more emails and letters'.
'Grandfathering', the appropriateness of exams, and the McDonald's comment are the hottest topics, she says.
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