The retail distribution review (RDR) kicks in on 1 January 2013 and it is clear that the financial services industry has its work cut out if it is going to be ready in time. This is the most radical change to distribution we have ever seen, but there remain a surprising number of unanswered questions.
It often strikes me that when it comes to investing people expect a lot for very little cost. If investing in a successful product can significantly enhance your wealth, why on earth would you object to paying for it? Everyone knows that you don’t get much in life for free, but are investors really willing to pay for financial advice? I love a bargain as much as the next girl but also appreciate that when it comes to major purchases, it is worth paying for quality. Shouldn’t protecting your financial future fall into this category? Writing a cheque to your adviser feels like a much more ‘real’ expense than charges that you never really noticed being taken from your investments. RDR is designed to protect consumers’ best interests, but there is a risk that some will view it as no more than an added expense.
It seems slightly mad that although over 40% of fund investments are made via platforms, we still do not know what RDR holds in store for this sales channel. This should become clear at the end of this year, and it will be interesting to see the response from providers. Interesting too is the fact that advisers will continue to receive trail commission on all business written until December 2012, with no plans to phase this out over time. It does not fit in with the philosophy of RDR that advisers are incentivised to leave legacy business untouched, when it could be in a client’s interests to make a switch.
RDR will present opportunities and threats to the various cogs that make up the supply chain of financial products, and we could see some businesses change beyond recognition. Many fund managers are likely to redirect their marketing strategies. If direct communication with investors increases, it will be more important than ever for providers to adopt a clear approach, and to offer products which are transparent and easy to understand. At the same time there will be specialist ‘restricted’ firm of advisers who will need sophisticated reporting and information from product providers, potentially at a level akin to fund of fund investors. We are likely to see increased polarisation within the industry – with fund managers focusing on the market segment which is most appropriate for them.
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