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The date for RDR implementation may still be nearly two-and-a-half years away but the process has already been a catalyst for major change in the market, especially among bigger distribution groups.
It is already clear that advisers want to take a significantly higher proportion of the overall amount that clients will spend on advice, investment management and product wrappers to bolster their income and offset the decline caused by the loss of commission. This represents a significant opportunity for advisers to grow their income, albeit to the detriment of historic business partners.
It is quite clear that in the brave new world, the adviser will agree not only their own remuneration but also that of each of the actors in the play.
As a rough rule of thumb, the nearer you are to the client, the greater your share of the margin will be. Whereas 18 months ago, it would bereasonable to conclude that fund management groups would suffer most from margin squeeze after the RDR, in practice, the role of the wrapper provider, whether it is a traditional life office or a platform operator, is becoming increasingly commoditised.
As each month passes, more major firms are forming alliances directly with fund management groups to provide their own investment solutions. These are being created using a plethora of vehicles, internal and external investment comm-ittees, risk-rated funds, multi-managers and fund of funds, to name but a few.
There are many reasons why such market evolution can produce improved outcomes for consumers.
The adviser is better positioned to ensure that customer investments are fully aligned with the consumer goals and attitudes to risk. Also, from the firm’s perspective, there is far less chance of an adviser going off piste and generating a portfolio which has disproportionate levels of risk relative to return.
When it comes to the practical execution of business, however, there seems to be a significant constriction as providers either have yet to recognise these changes in the market or try to resist the loss of this part of the value chain.
Many adviser firms have complained to me that executing their own invest-ment strategies, especially using online submission services, can be a frustrating and time-consuming process. All too often, there is a need for the adviser to manually re-enter much of the infor-mation they have already created, using their own client management system, attitude to risk and financial planning tools.
Taking such an integrated approach avoids the risks that inevitably occur when adviser firms use external asset allo-cation and fund selection tools where the risk profiles will invariably not be aligned.
There is a common misconception in the marketplace that different tools produce a consistent response but the reality could not be further from the truth. Invariably, each organisation supplying a tool will have added their own interpre-tation of the asset allocation mix most appropriate for each individual risk category.
In recent months, we have been exploring these issues with a range of advisers, life offices and platform operators via the F&TRC Adviser Forum, with the objective of identi-fying a range of approaches which can be adopted by such organisations and their technology suppliers. The next steps resulting from our initial consultation work are due to be delivered in September.
Creating a range of different investment solutions which offer varying levels of custom-isation could play an impor-tant role in creating different customer propositions. Significantly more work is necessary on the part of the adviser to maintain a fully whole of market investment solution. By comparison, risk-rated funds or lifestyle solutions offer the oppor-tunity to pre-package invest-ment propositions to reflect a range of risk profiles which can be presented to clients as part of low-cost solutions.
Advisers may prefer to offer whole of market advice to everybody but will the clients be able to afford it? The major challenge for advisers is finding a low-cost way to meet the needs of those consumers who cannot afford to pay the full cost of more traditional advice solutions. This raises the question of what is better for the client - independent advice based around a range of pre-pack-aged investment solutions created centrally by a whole of market firm or no advice because the client cannot afford it? To me and, I am sure, others, the answer is obvious.
In meeting the challenges the RDR presents, there will be a need for many of the conventional approaches that have been taken in our market to change significantly. Firms that show themselves as most able to produce a range of customer solutions tailored to meet the needs of consumers with varying budgets must be better placed to survive. Equally, if advisers need to attract a greater share of margin to remain economically viable, those organisations who look to IFAs for business must be prepared to embrace this change.
It will become crucial to eliminate the need for manual interaction to minimise costs for all involved. Tempting though it may be for some organisations to try to resist advisers taking control of wider parts of the process, the reality is that providers which seek to constrain this change will precipitate their own exclusion from the market.
Providers which want to remain part of the investment management process need to develop new ways of contributing to advisers’ investment processes while delivering the streamlined procedures essential for their products to be selected.
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