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March 15, 2013updated 05 Jun 2017 11:24am

Rolling with the Retail Distribution Review

The Retail Distribution Review has caused a lot of headaches for the wealth industry. Alison Ebbage speaks to three banks to find out how it has bedded down in the first few months and finds relative calm, although costs continue to climb.

By Alison Ebbage

The Retail Distribution Review has caused a lot of headaches for the wealth industry. Alison Ebbage speaks to three banks to find out how it has bedded down in the first few months and finds relative calm, although costs continue to climb.

The Retail Distribution Review looks to be shaping up well for private banks. Its intention is to ensure that advice is independent and reflective of investor needs. Clients are supposed to have a better understanding of products and services, understand the pricing structure and be confident that advisers are not product biased because they are working on commission. The final thread is to make sure that advisers are properly qualified and knowledgeable about their products, services and customers. Most private banks could make a strong case for already doing most of this and those that will see continued success will be able to harness the legislation to work in their favour and provide a better than ever value added and auditable service.

One component that has received a lot of attention has been the requirement for advisers to have achieved Qualifications and Curriculum Authority (QCA) level 4 and for evidence of continued professional development. The FSA said it expected 95% of advisers to have achieved this by December last year and will be publishing actual figures around the end of the first quarter this year. Without doubt this has influenced the decision of independent financial advisers (IFAs) servicing clients lower down the value-chain to exit the market. But for most private banks, reliant on the quality of the advice and the perceived value of their service provision, this has not been an issue.

Ian Scott, head of wealth planning at Arbuthnot Latham, says all its senior advisers are qualified to level six and we actively seek to regularly update professional development.

"We believe that professional qualifications and ongoing professional development increase the chance that advice given will be of a higher quality," he says.

How much did you say it was?

Charging structures however are somewhat less easy. Private banks are used to charging a fee for initial advice and service provision. But in the future they will need to work hard to prove that the service they provide is not product driven and that the charge they make for ongoing advice and service can be justified. In practice this means working to upgrade process and systems to leave a much more detailed and transparent audit trail of interactions with customers. All decisions, however small need to be recorded and justified. Although this may seem like common sense it could be, in fact, quite onerous and will almost certainly reveal differences between the various providers and their offerings.

Ian Woodhouse partner at PwC says pricing has not yet settled down and it is hard to guess at any sort of standardisation because it is an area where advisers will seek to differentiate themselves. Pricing seen by PBI puts charges for advice around 1% of assets up to £1m, with reduced rates for higher asset levels. Charges for dealing and custody range from 0.25% to 0.5%.

In practise this means banks will seek to upgrade the value they can add on the ongoing advice by engaging more frequently, over more channels and more alerts and research and so forth with clients.

"The RDR now means that the process needs to be utterly transparent and more details needs to be teased out from the whole pricing process. The ongoing fee for advice in particular will need to be earned – it is optional so banks need to be able to demonstrate what they have done and thus justify the fee. Banks need to be able to prove that they have a very real understanding of the client and their needs," says Michael Morley, chief executive at Coutts.

He also thinks that segmenting the client fee- distinguishing between the initial scoping charge, the services they use and the ongoing advice will become important. "Identifying what services it is that the client needs – stock broking on an advisory or discretionary basis, for example, will also be uncovered. Pre RDR this might not have been made explicit as the focus was very much on products. In this respect private banks are well placed as most provide a whole gambit of options."

But offering a whole gambit of options also means further consideration is due when it comes to whether a bank is tied or non-tied. Previously this was widely understood to be about whether an institution sold only a selection of products – for example a high street bank selling only its own brand products would be tied. But the RDR changes the way that this is defined into whether an institution advises on all types of investment vehicles. For example a stockbroker looking at the whole market would previously have been untied, but now would be considered tied. A bank offering pensions, insurance, funds would now be considered untied. For private banks, offering discretionary and advisory portfolio management as a stand alone is now considered to be a tied offering.

Scott thinks that again, clarity and transparency need to be applied: "The offering is very important. Under the RDR, discretionary managers for example might buy from the whole market but are counted as restricted as they only advise in one product area. This is potentially very confusing for the consumer."

Confusion is one thing, cost however is another with both Barclays and HSBC converting their advisory and discretionary models into a restricted offering and significantly reducing the amount of funds on offer. Both providers however serve the high end of the retail market and the mass affluent market. For their client base it was thought that having a wider offering was going to be appropriate.

Managed products might also gain in popularity as part of a holistic financial plan rather than advice and execution, according to Eric Barnett, CEO at SG Hambros Private Bank. "Providing holistic financial planning plays well into the business model for most private banks as they are able to offer the full range of services and advice," he says.

He thinks that there is opportunity for private banks to move down the value chain and attract clients at the higher end of the mass affluent scale. "The margins that private banks charge are generally less than those of IFAs and consumers will see this," he says.

Scott disagrees: "Ignore IFA groups at your peril," he says. "There are some high quality offerings out there that are truly holistic and know their target market inside and out. Private Banks might actually lose some clients to such groups," he says.


Costs climb

The requirement for complex reporting, so as to meet transparency demands and to satisfy clients that the fee being charged is truly justified, will come at a cost. This, potentially, is an area that some banks might struggle with, given that many of them have patchwork legacy systems ill-designed to provide such granular detail in the timely manner that customers now require as standard.

Indeed the FSA’s latest figures on the cost of the RDR have risen. It says the incremental compliance cost during the first five years of the RDR is in the range of £1.4bn to £1.7bn. It previously estimated it to be £0.6bn.

The FSA says the increase in cost is accounted for, in part, by higher estimates from firms of the costs of the required systems changes. Professional qualifications will cost the industry between £115m and £165m, up from a previous estimation of £120m. Disclosure documents and marketing costs are estimated to hit between £20m and £45m in one-off costs, up from £19m.

Clearly this is not something to be ignored and for many IFAs the cost of the RDR was simply overwhelming and forced early retirement or the sale of the business. For private banks however the systems and marketing element is just another good reason to invest in technology and software – something that is required anyway in order to be able to respond to demand for an enhanced service proposition from clients in the form of multi channel, 24/7 instant availability.

"The technological impact of the RDR means additional workload and cost. The RDR demands total transparency and the systems must be able to support that as well as unbundle the fee," Scott says.

Woodhouse meanwhile is more explicit. "Private Banks may well see a degree of consolidation just because of the cost implications in upgrading and maintaining systems. They will also need to upgrade the front office suite of tools so that they can manage this complicated process and be firstly productive and secondly compliant. Systematic evidencing of advice will require systems upgrade and automation and the quality of ongoing advice and the way in which it is recorded and evidenced will also need to improve."

For private banks on the whole the RDR is good news. But careful thought will be needed in terms of transparent and justifiable pricing models, re-educating clients to understand the brave new world of restricted and non-restricted offering and finally, investing in the systems and software to facilitate that.

Woodhouse concludes: "In summary, the RDR has done what it set out to do but is not yet fully understood by the end client. It will force a rethink of business models and how to add value along that charging structure and a re-evaluation what is and isn’t profitable."



The world watches

The success, or otherwise of the RDR is under close scrutiny from regulators in other countries. Indeed a well thought out and successfully implemented regulation like the RDR will lend itself well to other jurisdictions, according to Woodhouse.

Like the UK many regimes face the issue that product based commission leaves consumers vulnerable to misspelling. The RDR is one the first of its kind and makes the UK something of a role model. In the Far East, the Singapore Monetary Authority (MAS) last year launched a Financial Advisory Industry Review (FAIR) aimed at lowering the cost of financial products sold by commission-based insurance agents, and raise the quality of advice provided. The UK Crown dependencies are due to implement a tailored version of the RDR and it is thought that some regulators in continental Europe may now seek to emulate the principles of the RDR under the auspices of MiFID.

Morley comments: "What is now needed is for the RDR to work decisively in practice. The cost of it is probably less than some of the potential fines for misselling and the industry the world over must wake up to this."


Following previous studies in 2010, 2011 and earlier in 2012, the Financial Services Authority (FSA) surveyed 1,436 retail investment advisers (RIAs) in late summer 2012 to track progress against the RDR professional standards requirements.

Some high-level findings included:

Adviser numbers (late summer 2012)– There were 35,899 RIAs – a fall of 11.5% since summer 2011;– The largest group, those working for IFAs, made up 58% of the population, followed by advisers in banks or building societies at 19% of the population.

Intentions (late summer 2012)– 89% of all RIAs said they were definitely or likely to remain an RIA; – 6% (about 2,000) were expecting to be early leavers (retire earlier than planned, exit the industry, or take a non-advisory role);– The balance would retire as planned, didn’t know what they would do or were unsure of their prospects, although would prefer to continue as an adviser.

Qualification progress (Nov/ Dec 2012)– 93% of RIAs held an appropriate qualification (AQ). 2% were awaiting results on their final paper and 2% were still studying. A few advisers still needed to complete gap-fill. 3% of advisers did not intend to take an AQ. – Of RIAs without an AQ, 2% aimed to hold one by 31 December 2012, with 2% intending to hold an AQ after the deadline. – About 500 intending to qualify after 31 Dec 2012 were required to meet the RDR deadline (the others were recent entrants so have more time). These advisers will need to stop advising. If they are not approved for any other activities, their approved person status for the customer function must be withdrawn until they have attained an AQ.

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