Changes to financial services are underfoot. Tony Collins of Opal gives the lowdown on what the RDR means and its effect on consumers and the industry
The Retail Distribution Review (RDR) is a new piece of regulation that will come into effect at the end of 2012 and will ultimately change the financial services industry. It will apply to all advisors in the retail investment market, regardless of the type of firm they work for (for example, banks, product providers and independent financial advisors or wealth managers). This, in turn, will have an effect on financial products and how they are designed and sold.
The aim of this review is to improve interactions between the consumer and industry by various means. First, by improving the clarity with which firms describe their services to consumers. Second, by addressing the potential for advisor remuneration to distort consumer outcomes. Finally, by increasing the professional standards of investment advisors.
Improving clarity
Advisors and firms will elect to operate either independently or through a restricted option.
The independent option is offering unrestricted and unbiased advice. This may include a panel approach provided it covers a broad range of requirements and is regularly reviewed. The restricted option includes offering advice from single or multi tie and through simplified or basic advice regimes.
The advisors must make it clear which regime they operate in before advice is given. Execution-only will remain and will be the only area where no advice is offered.
Consumer outcomes
Product providers will no longer be able to commission advisors for the sale of a product. The onus is now placed on the advisors to set out their own charges in agreement with their customers.
Product providers may offer facilities for the advisor charge to be deducted from the investment. However, the deductions must be in line with investments and indemnity offerings will no longer be available unless this is agreed within the customer fee structure directly.
Also, if the advisor is to charge ongoing fees they must provide a service for the fee.
Products written pre-RDR, 31 December 2012, will not be affected by these changes and any alteration/top-ups to these products can continue on a commission basis post-RDR.
To ensure a clear understanding by the customer, an advisor must provide information that outlines the service and cost of the advice separately to the cost of the product. This is a requirement even where the product provider or firm in the same group provides the advice.
Products and services must also have clear pricing models that can be evidenced to the customer in an unbundled manner.
Professional standards
All investment advisors are required to attain a minimum level of qualification whether independent or restricted. This is intended to be equivalent standard to the first year of a degree and should be backed by an independent professional standards board together with an overarching code of ethics and potential continuous professional development framework.
The main focus on retail distribution regarding support for product providers is in the evolution of product design and administration technology to ensure product propositions are fit for purpose under RDR.
A few companies have already developed the functionality to administer structured products, onshore/offshore bonds and maximum investment products in both pre- and post-RDR environments, but this is something that needs improving.
Many advisors are already moving to an RDR-compliant remuneration model and as such, having the capability to support various remuneration packages, both pre- and post-RDR that can operate on and off wrap platforms is proving to be a significant advantage. These include commission-based packages for current environment and continued support for these products post-RDR. A fee basis is taken from the product as a percentage of funds or fixed fee offer “factory gate priced” option so the advisor can take a fee directly from the customer with impact to the investment.
Specific platforms enable the product provider to offer a full range of investment options from a simple restricted fund list, to full open-market architecture and model portfolios. This allows the product provider to adapt their proposition according to the requirements of each distributor’s sales model and offer complete flexibility.
Many advisors are seeing wrap platforms as being a solution to their RDR requirements as they provide a clear distinction between asset allocation and product advice, evidence of ongoing service provision and monitoring, clear unbundled charging structure as well as the capability to adopt the new remuneration regime. It is therefore vital to have the capability to link to multiple wrap platforms if required.
Having these development processes means that third-party administrators can offer providers the ability to move quickly and easily to an RDR-compliant model as well as reviewing their investment propositions for the advent of the new regime.
Providers are looking for the functionality to administer structured products, onshore/offshore bonds and maximum investment plans (Mips), among other products, in both pre- and post-RDR environments.
Tony Collins is chief executive at Opal.
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