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3 reasons why even the most stubborn IFA should welcome the RDR
In case you didn’t know, the world of financial services is going through a major change over the next few years as the Retail Distribution Review (RDR) does away with commissions and imposes higher educational standards on advisers. For many IFA’s, the RDR represents yet another bureaucratic headache getting in the way of the everyday business of helping their clients. However, here are three reasons why even the most stubborn IFA should welcome the enforced changes to adviser knowledge and commission.
The growth of Financial DIY
Compeer’s March 2009 Financial DIY report suggests that for those resistant to change, the RDR is a blessing in disguise.
Some of Compeer’s findings include:
- 29% of adults believe their knowledge is as good as financial advisers’ – uniformly spread across age and socio-economic groups
- 28% of adults believe advice is just disguised sales of investment products – A&Bs (39%) and 40-49 year olds (34%).
- 26% of adults believe financial advisors add insufficient value to justify their fees (A&Bs 38%)
It’s about time therefore that IFA’s upped their game for their own sake.
They also found that:
- Overall use of IFAs fell in 2008 – 7% fewer respondents regard a commission based IFA as their main financial advisor compared to 12 months earlier.
- 6% of adults cite a fee based IFA as their main financial advisor, up 33% on the previous year.
- A growing proportion of people (67%) taking professional advice now seem to have accepted a fee based model.
And when you take into account the trend from 2003 onwards the picture doesn’t get any better:
- 44% of adults view the internet as an essential source of financial information and advice.
- 42% of A&Bs unadvised in 2008 (26% in 2003) and 44% of C1s (27% in 2003).
- Of those with over £1m of liquid assets, 61% make all or most of their investment decisions with professional advice.
The growth of financial DIY is powerful. Nails are already being hammered into the coffin of the traditional IFA.
Life insurers are going bust
There’s the other small issue that life insurers are going bust. Life insurers often report rosey results on a European Embedded Value basis to satisfy the markets. However, these results include future premium income on policies sold but not yet collected. With less than half of policies in force after five years, the International Financial Reporting Standards measure which does not include future income but includes investment losses have been showing unsustainable losses for some time. Up front commissions funded by the illusion of long term contracts are therefore unsustainable.
The loss of indemnified commissions under the RDR is therefore insignificant. They were already on the way out.
Bear markets badly expose the transactional, commission based adviser
Traditional commission based advisers often sell themselves on their ability to pick funds, find the best product – little more than a personal shopper in some ways. When the focus is on the transaction rather than the long term plan, the indemnified commission based adviser’s credibility and business model tends to sink as fast as their client’s funds. By focusing on working with clients on their plans and charging explicitly for the life enhancing work, advisers’ business models are far more sustainable.
Be thankful for the RDR. For the transactional IFA, it is a wake up call. For those financial planners already prepared, the industry is better for it.
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Author: Mel Kenny
Posted: Wednesday, July 01, 2009 | 9:56:20 AM
Comments
It's a shame that the FSA never thought to ask them.
http://www.ifalife.com/forum/action/results.asp?Search=RDR
I have not seen much about the RDR in the national press...maybe time for New Model Advisers to start talking about it to the relevant journalists.
A lot of advisers, like myself, have come from a direct sales background (Allied Dunbar etc), where it was a breach of contract to charge fees for advice. They are the manufacturers, and want to shift product.
With the advent of WRAPS and professional development, the IFAs are in a golden situation to gain from both fees and comission, as opposed to comision alone.
The dependence on the large providers will then diminish, shifting the alance of power to in the IFA's direction.
We may well get extra competition from nationals like Tesco, who like the banks, have the cash to influence regulators.
George Kinder type financial life planning advice may well flourish in this ew era, as clients look beyond money at ways to lead a more balanced and fulfilling life, with our help of course.
What I would say is that the whole thrust of RDR is not about commission vs fees it is however about clarity. Adviser charging is about the adviser and client together determining the price and this not being influenced by product providers. It will still be perfectly possible for the adviser who wishes to bundle advice and implementation of a financial product to be paid by the client from the product purchased (just like with commission). this is all about disclosure and not about fees and commissions.
What is key here is proposition choosing the best product and the best funds is what the internet does (or will do pretty soon) and Iwould not want to have a business model based on something so weak