The Retail Distribution Review
February 9th, 2012
What is RDR and what does it mean for my adviser and for me?
The financial services sector is currently preparing for the Retail Distribution Review (RDR) – one of the biggest overhauls of financial regulation since the Financial Services Act was introduced in 1986. It was instigated with a view to improving service levels and transparency and ensuring the interests of financial advisers and their clients are in line.For the Financial Services Authority, the industry regulator, RDR is about establishing a “resilient, effective and attractive retail investment market that consumers can have confidence in and trust at a time when they need more help and advice than ever with their retirement and investment planning”. Specifically, RDR sets out to ensure that, as the client of a financial adviser, you: * are offered a transparent and fair charging system for the advice you receive; * are clear about the service you receive; and * receive advice from highly respected professionals. As things stand, all the changes required for RDR compliance will come into effect on 31 December 2012 and will apply to every adviser across the retail investment market, including independent financial advisers, wealth managers and stockbrokers as well as banks and other providers of financial products.What follows is designed to take you through some of the ways in which the proposed changes may affect the service you receive from your financial adviser – and why those changes may improve the advice you receive.
Adviser charging and the end of commission
The most visible change for many clients of independent financial advisers will be the introduction of fees for financial advice. Historically, advisers have relied on commission from product providers to pay at least some of the costs you incur when you consult them for advice. Regulators have taken the view this could give rise to a conflict of interest as some product providers offer higher commission payments than others for the same solution. It certainly has the potential to create some anomalies. For example, it was difficult for advisers to recommend non-commission products – such as exchange-traded funds (ETFs) – without going out of business. It also meant advisers normally needed to recommend a product to get paid, when in fact, no product might have been the right answer to a client’s needs. Equally, it meant there was some unintentional cross-subsidy across clients. All financial advisers will now have to outline and agree fees for their advice in advance. You will become responsible for meeting these fees and product providers will no longer be able pay a commission in any form. For many clients this will be the first time they have had to pay a fee directly for advice. The idea is that this will make the process more transparent as it should be easier for you to work out what your adviser is charging, what they are doing in return for that charge and then to compare their proposition with that of other advisers.
A new definition of independence
‘Independent’ has always been a description that could only be used by those advisers who researched the whole financial market. Under RDR, the definition of ‘whole of market’ has expanded and will now cover areas such as ETFs, private equity and other more esoteric asset classes. An independent adviser must demonstrate they have considered all of these products in the process of addressing your financial requirements. Under the new rules, if an adviser cannot meet the definition for independence, they will be deemed to be ‘restricted’. This means they will use a smaller range of investments in addressing your financial requirements. In practice, of course, this may actually be sufficient for many clients whose financial needs are not all that complicated.
All financial advisers in the UK – whether they are described as ‘independent’ or ‘restricted’ – will have to achieve a higher minimum standard of qualification before they are allowed to provide advice. This means an increase in the basic level of knowledge and will lead to a higher level of professionalism for the industry as a whole. Many advisers are using the changing regulation as an opportunity to obtain qualifications beyond the minimum standard – for example to chartered or certified status. Adviser clients should be reassured by these new standards.
Greater information and transparency
In conjunction with other recent legislation, however, RDR has specific rules about how clients should be treated and what information they should receive on an ongoing basis. Approved individuals within each advisory business are also legally accountable for ensuring those rules are followed. This provides you with the added reassurance your adviser’s business is being closely monitored within a regulatory framework. In the unlikely event anything does go wrong, there is both a set process and a chain of personal accountability to ensure things are put right.
Better business model
Many advisers are moving to a financial planning rather than product recommending role. Prior to RDR, an adviser might recommend a portfolio of investments to populate, for example, a pension or an Isa. Now, rather than recommending specific funds, say, they are more likely to offer you a comprehensive financial plan and help you keep this on track as your life changes and develops. This will involve recommending a whole range of different products and solutions, depending on what your circumstances demand. Also, as part of the changing charging structure for advisers, you are likely to be able to pick through a menu of different advice options. For example, if you have the confidence to run your own affairs but also like to chat through issues on an intermittent basis – much the same as you might do with your solicitor or accountant – you could perhaps just pay by the hour, ask the questions you need to and then walk away.
Alongside the developments in regulation and communication, developments in financial-planning technology have taken the industry by storm. In various areas, more secure, more flexible and more user-friendly systems mean the way in which your financial plans and products are checked and monitored has improved immensely.Many now have the ability to access information on your products and investments at the touch of a button. For example, instant portfolio valuations let you know if your plans are on track – or if any element is underperforming – while detailed breakdowns of the assets you hold, even when fund managers are continually trading the underlying stocks, mean you can spot and realign your investments with your risk profile before any deviation gets out of hand. Please note: This information is based on Financial Services Authority publications and our understanding of the proposals as at January 2012. These may be subject to change as they pass through the final stages of approval and implementation into law.