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11 steps to meet the RDR

Industry consultant Campbell Macpherson offers some advice to IFAs on the road to the RDR.

Let’s be honest. The RDR will drive thousands of advisers out of business. It will force thousands more to merge in order to survive. It will force several networks into administration. It will cost the financial services industry a fortune and cause downwards pressure on share prices across the board. It will reduce the proportion of the population who receive financial advice and it will dramatically decrease the level of regular savings in the UK.

So, why is the FSA doing it? Simply because its research has led it to three key conclusions – consumers don’t trust financial advisers, commission drives providers and advisers alike to think of themselves ahead of the customer and the lack of transparency in product pricing is confusing to the customer and results in inappropriate product choices and higher costs to the end client.

I have met hundreds of advisers who simply do not recognise these findings. These advisers are professional and highly trusted by their clients whom they have been servicing faithfully for twenty years or more. They are highly transparent when it comes to commission and they ensure their clients completely understand where this money comes from.

While each one of the FSA’s findings can be refuted robustly (and a great deal of printing ink and blog space has been dedicated to doing just that), any good myth is based on a kernel of truth and, in the end, we have to face the facts; these are the results of the FSA’s research and the new rules will be designed to tackle these fundamental issues of trust, professionalism and transparency.

So, while the intended outcomes of the RDR rules are highly laudable, in leaping to the defence of the seemingly defenceless end client, the FSA appears to have forgotten one key inconvenient truth about this industry of ours – financial services are sold not bought.

No-one leaps out of bed with a burning desire to sort out their critical illness insurance, a fear that their pensions may be better off elsewhere or worrying if they have enough regular savings to achieve their financial goals. Ours is not a demand-driven industry. The demand needs to be created and information-based web sites, however well-designed, simply will not achieve this. Face-to-face advice is the only way to create such demand, and the RDR will reduce the number of face-to-face advisers, potentially by as much as 40 per cent if some of the more alarmist research is to be believed.

Another undeniable truth is that – as things stand today – only a small proportion of end clients will pay for financial advice. This is for a number of reasons. It is partly because they have never thought about it, partly because the majority of people do not view financial advisers in the same league of professionalism as lawyers or accountants and partly because only a minority of people receive financial advice today. But it is also because the economics are unlikely to add up for most consumers. The majority of people don’t place themselves in a high net worth or affluent socio-economic bucket; and the majority of people don’t buy a broad range of financial service products from an adviser. Therefore most people wouldn’t be able to afford to pay the sort of advice fees that advisers will need to charge in the absence of commission.

The immediate outcome of the removal of commission will be a very crowded market for HNW and affluent clients and very few investment, savings or pensions solutions being provided to the rest of the population. Bancassurers and banks will sweep up the direct end of the market – but mainly giving the minimum advice required to sell simple protection, ISAs and the like. There will remain a large swathe of the UK population (the “mass market” as the marketers like to call them) who will simply not invest or save, because no-one will be able to afford to sell to them.

I believe this is an inevitable outcome of the RDR and while it may be disastrous for the long term financial plans of millions of UK citizens, it need not be disastrous for financial advisers.

In fact, the RDR presents a once-in-a-lifetime opportunity for those professional financial advisers who are up for the challenge and have the courage to meet it head on. There will be fewer advisers immediately post-RDR, yet the need for financial planning will still remain.

A significant number of advisers will be looking to retire or merge, presenting opportunities for other advisers to grow by acquisition or merger. Lastly, moving your earnings from upfront commission to recurring revenue streams will significantly increase the long term value of your firm.

What would I do if I were a financial adviser wishing to thrive in a post-RDR world?

1. Get the qualifications. This is one of the key areas where I wholeheartedly agree with the FSA. Professional qualifications are the foundation of any profession. Don’t put it off. Do the exams.

2. Calculate your likely future cash flow gap once commission is replaced by fee income. Knowing the size of the future challenge is half the battle.

3. Segment your client base and increase the numbers of affluent clients, whom you know will pay for your advice. Find other ways to service the remainder of your client base as efficiently as possible (web, phone, …)

4. Minimise your operating costs, streamline your processes and become as automated as possible.

5. Build a menu of services to offer your clients; pick a small pilot group of clients and start a new fee-based relationship with them. Deliver a professional holistic advice service that clients will value enough to pay for. Do this asap. Don’t wait until New Year’s Day 2013.

6. Partner with a well-funded service provider or network that will be able to help you prepare for RDR; one that will support you no matter what path you choose and with the financial strength to survive long term.

7. Opt for trail commission as much as possible over these next three years to help bridge your forthcoming cash flow gap.

8. Go broad and expand your range of advice to include protection, mortgages and GI. Not only will the commission from these products help support your cash flow but the broader range of solutions you are able to advise on, the more likely it will be that your clients will agree to regular service fees.

9. Alternatively, become a protection/mortgages/GI specialist and look to merge with another firm.

10.               The final alternative is to find someone to sell your business to. Your client relationships have real value – even in the new world.

11.               But most of all, analyse your business, make a decision and embrace the change. The “bad old days” of investment commission are about to become a relic of the past.

Campbell Macpherson is a consultant currently assisting the Openwork Network with its strategy.



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There are 8 comments at the moment, we would love to hear your opinion too.

  1. Given the volume of business transacted on platforms and the FSA’s RDR stance on consideration of platform charges it’s surprising that the word “platform” does not appear in these steps!!

  2. A well thought out and presented article. One would like to think that decision makers at the FSA might read it and think, “Hang on, thousands of investors are going to be disenfranchised and it will be our fault”. The 11 points are spot on but I suspect the majority of IFAs that survive and prosper post-RDR have read through them and found they have already covered them and operated on this basis for many years.

  3. You must be joking 20th April 2010 at 10:19 am


    I think there’s been an awful lot of “guff” written about the possible consequences of RDR, mainly by those with a vested interest.

    Personally I have a very low opinion of anyone who calls themselves a “consultant” (other than the medical profession, of course) as it remind me very much of my favourite joke about teachers…

    “Those who can, do; those who can’t, teach” – its very easy to replace “teach” with “consult” don’t you think!

    Lets have some logic here:

    People in general (clients are people after all), are not so dumb as to think their IFA doesn’t get paid.

    No-one should be advising unless they can prove they understand what they are advising on.

    The FSA want to remove product/provider bias (commission) but are happy for IFAs to construct their own charging model – as long as this has no bias of course.

    So, to meet RDR, there’s really only 3 steps that need to be taken:

    1. Pass those exams – do you really need to revise – you do this every day?

    2. Sort out your adviser charging – we charge 3% plus 0.75% per annum irrespective of propduct wrapper / provider for any lump sum business. The option the client gets is write a cheque or we’ll take it from the product – makes no difference to them either way.

    3. Sort out your proposition – there’ll be no “discounts” after 2012 so yo need to prove what you are doing/will do will add value that the client understands.

    There you go, 3 steps instead of 11!

    Remember the old chinese proverb:

    The man who takes the shortest route, arrives there quickest the man who walks around the houses, arrives with aching feet!


  4. I’m not sure this analysis of RDR has properly addressed some of the more important areas.

    I agree it likely that the overwhelming majority of business post 2010 will have the adviser remuneration paid by the provider, rather than by the client, even though this will no longer be referred to as commission.

    The practical mechanics of running a business post RDR will therefore very much depend upon IFAs understanding exactly how providers will conduct themselves in areas such as admin systems, the proposed decency limits, the format of proposal forms (particularly the section on agreeing adviser remuneration) and the style of initial illustrations/post sale disclosure.

    Next, the Regulator has made it clear that advisers should not receive remuneration that has not been agreed by the client. Clients will be able to switch off fund based trail payments. IFAs that are building a business based on trail could see their financial legs kicked from under them post 2012. IFAs will need to provide a credilble ongoing service to justify on an ongoing income stream (not just sending annual statements or giving access to online valuations) and most seem blind to this.

    Last, VAT is a major concern and IFAs need to understand the goalposts. Essentially, if remuneration is going to be received in relation to the ‘arrangement of a contract’ then no VAT will be generated. If a wider service is provided then VAT will be generated. IFAs that therefore go down the route of holistic financial planning, without having an ‘arrangement of contract’ service will give their client with an unnecessary VAT bill.

    Cash flow shouldn’t be the main issue in the change to RDR. The real issue is going to be for those IFAs who still tell their clients (or leave the impression) that they are providing advice without cost. These IFAs will have to operate in a completely different landscape post 2012 and it will be difficult for them if they leave the change in the way in which they explain themselves until the last minute.

  5. “Partner with a well-funded service provider or network …” – that will be Openwork Network then??!!
    What I’ve not heard much (any??) of is how networks themselves plan to face the RDR when the old model of increasing member commission so that the uplift pays for network services seems to be under threat …

  6. Campbell, I agree completely with your introductory paragraph but have to take issue with your summary of the FSA’s rationale. Their onw research and that of the ABI, both carried out by Charles River Associates, highlighted that commission bias was more perception than reality. Sheila Nicholl has recetly confirmed that they are as concerned with perception as reality.

    Therefore the REALITY is that the FSA has always had a plan to design an advice world where transparency is the king even if it results in the beheading of up to 50% of the loyal troops.

  7. I can’t disagree with the 11 or 3 steps but we should not underestimate how important it will be for IFAs to find ways of of differentiating their product – the providsion of technically sound financial advice and product sourcing. Given the advice and product sourcing will be to a common commoditised standard, the greater opportunities to differentiate will be around excellent customer service and client communication.

  8. useful artical

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