How is the industry getting ready for RDR?

January 2012

With officially less than a year to go until the implementation of the Retail Distribution Review, various firms are getting ready to change their working practices in order to welcome the development. However, new research suggests some are having more difficulty with this than others.

It is now officially less than a year until the December 31st 2012 implementation of the Retail Distribution Review (RDR), which is aimed at further protecting consumers and boosting trust and confidence in the market. According to the Financial Services Authority (FSA), it will provide more help and advice for those planning their retirement and investments, and help to establish an attractive, efficient and resilient economic environment in which to do this. Trained independent financial advisers (IFAs) will need to inform the consumer about the cost of advice and agree with them on it - rather than use commission-based models of payment on pensions and investment products - as well as making completely clear whether the guidance is independent. If it is not, there needs to be a full explanation as to why, the FSA says.

So, how are different firms readying themselves for the beginning of this new era? And are some having a more difficult time than others in doing so? After all, a survey by Aviva back in September 2010 found that 39 per cent of IFAs believed their biggest challenge prior to RDR would be the switch to fee-based advice, while over a quarter said "charging was an issue".

According to new research, it could be argued that advisers are slower getting off the mark than might otherwise be expected. Analysis of the MyTouchstone database, produced by Equifax company Workload, shows there is a "long way to go" for a majority of organisations, reports IFA Magazine. The database's measure of whether a firm is ready is if it can show that more than three-quarters of its income is produced from fees. However, the statistics demonstrate that at present almost 90 per cent of the 4,300 IFAs in the survey still generate over 25 per cent of their income from commission.

IFA Magazine said this is likely to be "another area of concern" for the industry; it quoted Workload's director and general manager Neil Cunningham, who agreed the reliance on commission would be a "key hurdle" for firms to overcome in the run-up to RDR.

Indeed, Aegon UK's group marketing director Paul McMahon said preparation is requiring "a massive amount of change for all players".

"There's inevitably a significant degree of angst when so much change has to be managed but we must never lose sight of the original reason for the RDR - the critical need to address fundamental weaknesses in our industry model and establish a sounder foundation to address the levels of distrust, disengagement and under-provision prevalent amongst UK consumers," he added.

Mr McMahon added that firms have had to make some important choices about how to adapt to the legislation, requiring a great deal of effort to ensure advisers and consumers evolve with the right amount of support and guidance. But last month, research by Legal & General suggested that it may be hard for everyone to make the switch painlessly. Some 65 per cent of investors who responded to the survey said hourly charges introduced by IFAs would deter them from using such services, although those with investment portfolios worth over £200,000 would be more likely to pay for guidance than their smaller counterparts.

Regardless, firms may want to ensure they are as fully prepared as possible as the implementation date draws closer, if comments from Legal & General's managing director Simon Ellis are anything to go by. Despite the suggestion that investment costs will increase overall post-RDR, he maintained it is crucial to remember the value of "good quality, independent advice" for the consumer, especially if a reluctance to pay for advice results in a higher risk of making poor monetary decisions.

Employers might also have some tricky discussions to undertake in the months ahead, another expert warns. Steve Herbert, Jelf Employee Benefits' head of benefits, said talks regarding remuneration of consultants and advisers will have to move forward because at the moment there is a certain amount of "ambivalence" on the issue.

"If nothing changes on the scheme going forward, the commission model can carry on, but if a company actually wants to make any significant changes to the shape of a scheme then in all probability they are going to have to find a different way of remunerating their advisers," he told online publication Employee Benefits.

So, the pressure looks to be on for the industry, which has "a fight on its hands" to make sure it is ready in time for the end of the year, agrees Natalie Holt of Money Marketing magazine. She said although much of the focus has so far been on whether or not IFAs are properly qualified, firms that have not yet rolled out a fee-based charging model may need to start considering this very shortly indeed, as it is not something that can be adopted in just a few months.

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