With the evolution of distribution, particularly in light of a still weak economy, there are other significant challenges for the industry to bear in mind – the broken life business model, the growing complexity for consumers of personal finance and the threats and opportunities faced by distributors. But first, let’s look at the RDR.
RDR – threat or opportunity?
Fundamentally, I believe the RDR will deliver a more transparent and fairer charging system for customers who choose to pay for financial advice. For many individuals, it will provide better outcomes, essential to restoring trust in the industry.
Recent research continues to show that payment by commission leads to a conflict of interest and by removing the potential for commission bias to distort buying patterns, the RDR will also deliver a transparent and fairer charging system.
Historically, it has been widely acknowledged that the commission system has, in part, created a culture of product bias, that has led to a long list of misselling issues, that has significantly damaged the reputation of the industry.
However, looking at the individual wealth market for 2009-15, research suggests that one of the consequences of the RDR will be that it may reduce the number of IFAs.
New business for the IFA channel is predicted to decrease from a 72 per cent share to 61 per cent by 2015, with restricted advice channels growing to fill this space, from 21 per cent to 30 per cent.
The other channel set to grow, given increases in consumer confidence in financial matters, and ease of access to information and products via technology, is the rise in investor self-service.
Options for remodelling financial advice
The number of IFAs and percentage share may go down but IFA new business is forecast to increase, meaning more business to share between the RDR winners.
The annualised premium equivalent value for IFA new business is set to rise from £9bn to £11bn by 2015, restricted/tied advice channels will grow from £3bn to £5bn, and the direct-to-consumer channel is expected to double, from £1bn to £2bn.
Although, theoretically, the growth of the internet means information about financial products and the ability to access and purchase them direct is greater than ever, the topic of personal finance is probably still far too complicated for the majority of consumers to fully comprehend.
A confused status
With tiered income tax, tiered National Insurance, tiered tax relief based on tiered income and Budget announcements made so far in advance that no one remembers what they are when they come in, it is hardly surprising that there is a certain inertia when it comes to purchasing financial products. In recent times, changes to inheritance tax and capital gains tax were announced a long way in advance of the actual introduction.
Historically, consumers were not exposed to much of the complexity, with the hard work done for them – they simply joined their company final-salary pension scheme. Now, however, only three of the FTSE 100 companies still offer defined-benefit pension schemes to new employees.
Given that the fund universe is massive, with around 30,000 funds from across Europe available to UK investors with many funds doing roughly the same things, investing must be made much easier for consumers and less really is more for most investors.
The at-retirement market itself is complex and contradictory to other types of financial purchase. Would anyone lock into a lifetime mortgage when rates are at a historical high?
It seems unlikely but this is what people are doing with annuities – they continue to buy them even though the rates are at a 20-year low.
The benefits of annuities and guaranteed income, versus control and potential for rising income, need to be weighed up for each individual’s circumstances. For many, annuities will still be right but it should be a conscious decision and the open market option considered to ensure the best deal.
Control becomes even more important as people are living longer. For advisers, there are also great opportunities to provide over, say, a further 20-year period, active and ongoing financial and investment portfolio management advice for their older clients. Advisers should therefore ensure clients get the right outcomes to meet their own particular needs.
There has been a great deal of political posturing over retirement. There has been some progress made by the previous and the current Government there are still no real answers and it is fair to say that the need for advice is now at an all-time high.
From a job to a profession
It is clear to me that standards must be raised even further in order to restore trust in the financial services industry and turn independent advice into a recognised profession.
There is nothing to stop advisers being viewed with a comparable level of professionalism alongside the likes of, say, architects and accountants. But to win the confidence of the general public, they must agree to adhere to a common set of professional standards set at a meaningful level.
The RDR’s implementation is essential to achieving this. The requirement to obtain a general qualification would put IFAs on a similar footing to other professions. Architects, for example, must meet the standards of the Architects Registration Board on an annual basis in order to maintain their registration.
The RDR challenge for advisers is threefold. Advisers must gain qualifications in order to thrive after the RDR and many must still re-engineer their business to move to a transparent, fee-based model.
In addition, there is a need to factor in a new definition of investment products, which includes investments, exchange traded funds and structured products as well as packaged products, such as mutual funds, pensions and bonds.
Long-term client relationships
All this builds the opportunity for a long-term strategic money management relationship with clients rather than a tactical, sales-based one, where clients pay advisers to make their assets grow and their tax shrink over time – a win/win relationship for client and adviser in the long run.
Further research suggests there is a disconnect between where IFAs say they spend the majority of their time and the services that clients say they value the most from their adviser. The areas that appeal to clients include: relationship management, strategy and advice and regular reassurance – in effect, the personal interaction elements of the relationship.
IFAs should consider outsourcing the elements that clients value the least, such as asset allocation, and product and fund selection. Focusing on products and investments causes clients to concentrate on product performance – a situation which could prove to be unsustainable.
What clients say they want is a trusting and long lasting relationship with their IFA, based on advice that will help them fulfil their lifestyle and financial goals.
Implications on product design
We need to look back in order to look to the future. The first wave of baby boomers were born directly after the war and the peak dropped off rapidly as enforced austerity came into effect, driven by rationing and the fact that the Government effectively went bankrupt following World War Two.
In the mid 1950s, the era of the teenager and rock and roll was born – along with a lot of babies. A period of relative prosperity through the 1960s, where money and more liberal attitudes encouraged more social interaction – until the pill came along and slowed it all down again.
The main wave of baby boomers is now starting to come through as 55-year-olds – the new minimum retirement age. There is currently already £16.5bn invested in the at-retirement market and, with the increasing number of boomers set to retire over the next few years, this is due to increase substantially. Our estimates suggest this figure will grow to around £32.2bn by 2018 while some other estimates go as high as £50bn.
Moving from saving in a pension to investing it to provide an income is one of the few two bites of the cherry to come along for advisers.
All the accumulation money that is earning an adviser nothing in trail commission can be picked up and turned around to form the basis of advisers’ post-RDR business – long-term income prod- uction for retired clients.
On this basis, simply selling clients an annuity may not be the right approach, something reflected in the recent increase in alternative third-way products.
Looking at the RDR in isolation can look daunting, and yes, there are changes that will need to be made to many businesses and to the approach that many advisers have. However, if you don’t treat it in isolation and combine the RDR with long-term service based on relationships, new product innovation to meet the needs of the baby boomer generation and the efficiency improvements available from platform technology, the threat turns into a golden opportunity that will create a powerful legacy for future generations of consumers requiring independent financial advice.