Now that the Retail Distribution Review has come into force, Trevor Morton examines whether it has had the catastrophic effect on the IFA industry as feared

At the time of the FSA’s launch of the Retail Distribution Review (RDR) in 2006, few people could have foreseen the tsunami that was set to wash over the industry. A near free-for-all in financial services was created in the eighties by the now late Margaret Thatcher. This was topped-out in 2005 by Gordon Brown and Ed Balls’ desire for an even lighter ‘light touch’ approach to regulation that contributed, in part, to a laissez-faire approach to consumers and the subsequent loss of trust of the industry from mis-selling and poor advice. The Walls of Jericho began tumbling down when Northern Rock, then HBOS and others either failed or saw substantial losses. The eventual task of restoring consumer trust and confidence in financial advisers took on a new dimension. RDR, with the potential to affect the roles of over 30,000 advisers, came into force on 31 December 2012. The question has to be asked - are the doomsday predictions of the naysayers coming true?

We should remind ourselves that RDR is not a product of the FSA in isolation. At the Gleneagles Savings and Pensions Industry summit in September 2006, Callum McCarthy’s landmark speech that condemned product providers, intermediaries and regulators alike catalysed the industry to make changes.

Following the publication of the RDR discussion paper in June 2007, the FSA received feedback via more than 1,000 responses, the highest number of responses the FSA has received for any consultation. From the exercise came a core consensus that standards of professionalism and adviser compensation were key determinants of public trust and consumer confidence.

Since its inception, RDR has faced scrutiny from all quarters, not least the IFAs. Fears were that a signification percentage of the adviser population would be displaced. By mid 2011, Aviva Life marketing director David Barral was quoted as saying “that by 2013 IFA numbers will fall to 10,000 in total as advisers fail to comply with RDR changes, leaving middle-market consumers un-serviced”. In a similar vein, head of insurance advisory at Ernst & Young, Shaun Crawford added, “of a population of over 30,000 advisers… at least a third [will] leave”.

The consequences mean that consumers at the lower end of the scale will be left without advice from an IFA as the industry realigns to more affluent personal and corporate clients. As recently as February 2010, research by Allianz Global indicated that 27 per cent of investors said they were willing to pay up to £50 an hour, while 32 per cent were not willing to pay for advice. In a statement to a Treasury Select Committee in November 2010 FSA chief executive Hector Sants told ministers: “The RDR is not a panacea to the investment market, but it is set to deliver specific improvements for investors. But it is worth a third of IFAs leaving the industry.” Five months in, has it decimated the industry for advisers and will it return annual benefits of ‘multiples above’ the estimated bill of £1.7 billion?

According to the Chartered Insurance Institute (CII) director of policy and public affairs David Thomson: “We can now start to look at a post-RDR world based on factual impacts of the changes to professional qualifications and the numbers regulated professionals. With the FSA estimating the total number of advisers to be around 34,000, there has been some contraction in their number. But this has been concentrated in the retail banks and building societies. This may create a short-term gap in the market. But fears that the industry would be completely decimated are unfounded. Add to this that we have issued close on 22,000 Statements of Professional Standing so far, and these numbers will increase further still by June of this year as advisers that did not need to re-qualify before the January RDR milestone, will do so. So from our perspective, there are reasons to be cheerful. We are seeing strong signs of many professionals now going beyond the benchmark qualifications. The number of those moving chartered status will go up considerably over the next two to three years. Whilst the industry has been focused on losing advisers, what has actually happened is the emergence of a much-defined cadre of highly qualified professionals. One of the upsides of RDR is the emergence of a financial planning as a profession, not just an industry - smaller in scale yes, but seen by peers in other professions and the wider public as more qualified and competent.”

There is a general feeling that preparations by the industry for RDR have been thorough. The RDR milestone has passed and, anecdotally, there is no evidence of a consumer switch-off when informed of the advice related fees. Transparency may be the discipline that creates a sea change in the industry and defines the integrity and status of financial planning as a profession, but in reality, we’re still at the beginning of a new chapter. Market changes will see mergers and changes in the size of firms, and the marketing of new propositions to grab market share. There will be winners and losers.

“There are many factors that will take time to interpret,” Thomson says. “We’ve gone through the qualifications and regulatory changes. Now it’s the structure of the markets that drives transformational change. Yes, changes in reporting will create operational challenges and affect costs. The customer hasn’t gone away, only the way we interpret their needs has changed. The sector is incredibly durable and the benefits will be seen fully in the medium to long term.”

SCM Private founding partner and spearhead of the True and Fair Campaign, Gina Miller, says: “Four months in, and RDR has not reduced adviser numbers by quite as much as first feared. However, anecdotally we are hearing that advisers are finding the post RDR landscape very challenging with clients reluctant to pay for advice, whilst their own regulatory and PII insurance costs spiral upwards. It would appear possible that numbers could fall materially from here.”

On the subject of whether or not individuals have been put off by the upfront fees Millar added: “I am sure this has been a factor as before RDR many of the charges, whether initial or on-going charges, were taken from the product rather than charged direct. In a low return environment, when people see that as much as half their returns can be eaten up in fees, it is understandable that they are being put off – in fact we have had several calls where the clients are actually in shock.”

Tideway Investment Partners managing partner James Baxter does see adviser charging as driving
change in consumer habits.

“There are signs that some people are walking away from face to face meetings and turning to self-service. But there are increasing numbers of providers out there who are geared to this client base. It’s a trend that’s been underway ahead of RDR but has now been sped up,” Baxter says.

“People have become accustomed to self-serving in the accumulations phase of pensions. The internet and Google are creating more savvy consumers who call aware of the rules. But as they approach retirement and go into the capital preservation and de-accumulation phase, there clearly is a need for some level of advice. We will see more people self-serving at this stage but there will always remain the need for specialist advice given the potential complexity. In our experience, where customers see and relate to the value it brings, charging will not be an issue.”

Founded in 2010, the business specialises in fixed income and asset management and particularly focused on the area of income drawdown. James Baxter implemented advice-based charging from the outset.

A number of other firms have been working to a RDR model in anticipation of the 31 December go-live date. According to Rob Hird, director at Premier in their wealth planning business: “Our well-defined and transparent remuneration structure has been well received by both existing and new clients, all of whom appreciate the need for quality financial advice and a mutually agreeable fee basis. We have been encouraged by our clients’ initial reaction to the new RDR remuneration structures and the open discussions we have on the subject. Clearly, this places our relationships on a very firm footing going forwards. With regards to an advising firm’s on-going willingness to provide pensions advice, this will become clearer over the coming months once there is greater clarity on the true impact of adviser charging and profitability on their balance sheets.”

Steve Herbert, head of benefits strategy at Jelf, an independent consultancy handling financial planning and employee benefits, says: “Had the RDR change come in any other year of the last decade, it would have severely limited the advice market. The impact has however been mitigated by the need of employers of all sizes to seek advice to meet their auto-enrolment duties, so for the moment, the number of employers seeking advice has increased (significantly). By the same token, most advisers are now working flat-out to meet client demands, and some have actually increased head count accordingly.”

Given the broad church of the financial planning and pensions, it’s natural that some commentators see the glass half empty, while others see it as half full. Yes, it is early days, but there is no meltdown in progress. Research this side of the 1 January watershed is optimistic. Amongst the findings of a CII research report on consumer views of the reforms is that 61 per cent of the advised population believe the changes would improve their confidence in the advice market.

A survey of IFAs by market research specialist Opinium shows 46 per cent of IFAs when questioned think their business will be better off over the coming 12 months.

Thomson sees the upside of RDR. “Financial planning will no longer be a career that people fall into or a lifestyle choice. Whilst a number of people have left the sector, the challenge will be how the profession manage the acquisition of new talent”. The report points to a potential new client base in excess of 5.3 million.

Trevor Morton is a freelance journalist

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