THE RETAIL
DISTRIBUTION
REVIEW
EXPL AINED
What is RDR and what does it mean
for my adviser and for me?
The financial services sector is currently
preparing for the Retail Distribution Review
(RDR) – one of the biggest overhauls of
financial regulation since the Financial Services
Act was introduced in 1986. It was instigated
with a view to improving service levels and
transparency and ensuring the interests of
financial advisers and their clients are in line.
For the Financial Services Authority, the
industry regulator, RDR is about establishing
a “resilient, effective and attractive retail
investment market that consumers can have
confidence in and trust at a time when they
need more help and advice than ever with
their retirement and investment planning”.
Specifically, RDR sets out to ensure that, as
the client of a financial adviser, you:
• are offered a transparent and fair charging
system for the advice you receive;
• are clear about the service you receive; and
• receive advice from highly respected
professionals.
As things stand, all the changes required for
RDR compliance will come into effect on 31
December 2012 and will apply to every adviser
across the retail investment market, including
independent financial advisers, wealth
managers and stockbrokers as well as banks
and other providers of financial products.
What follows is designed to take you through
some of the ways in which the proposed
changes may affect the service you receive
from your financial adviser – and why those
changes may improve the advice you receive.
Adviser charging and the end of
commission
The most visible change for many clients
of independent financial advisers will
be the introduction of fees for financial
advice. Historically, advisers have relied on
commission from product providers to pay at
least some of the costs you incur when you
consult them for advice. Regulators have taken
the view this could give rise to a conflict of
interest as some product providers offer higher
commission payments than others for the
same solution.
It certainly has the potential to create some
anomalies. For example, it was difficult for
advisers to recommend non-commission
products – such as exchange-traded funds
(ETFs) – without going out of business. It
also meant advisers normally needed to
recommend a product to get paid, when in
fact, no product might have been the right
answer to a client’s needs. Equally, it meant
there was some unintentional cross-subsidy
across clients.
All financial advisers will now have to outline
and agree fees for their advice in advance. You
will become responsible for meeting these fees
and product providers will no longer be able
to pay a commission in any form. For many
clients this will be the first time they have had
to pay a fee directly for advice.
The idea is that this will make the process
more transparent as it should be easier for
you to work out what your adviser is charging,
what they are doing in return for that charge
and then to compare their proposition with
that of other advisers.
A new definition of independence
‘Independent’ has always been a
description that could only be used by those
advisers who researched the whole financial
market. Under RDR, the definition of ‘whole
of market’ has expanded and will now cover
areas such as ETFs, private equity and other
more esoteric asset classes. An independent
adviser must demonstrate they have
considered all of these products in the process
of addressing your financial requirements.
basis. Approved individuals within each
advisory business are also legally accountable
for ensuring those rules are followed.
systems mean the way in which your financial
plans and products are checked and monitored
has improved immensely.
This provides you with the added reassurance
your adviser’s business is being closely
monitored within a regulatory framework. In
the unlikely event anything does go wrong,
there is both a set process and a chain of
personal accountability to ensure things are
put right.
Under the new rules, if an adviser cannot
meet the definition for independence, they
will be deemed to be ‘restricted’. This means
they will use a smaller range of investments
in addressing your financial requirements.
In practice, of course, this may be perfectly
sufficient for many clients whose financial
needs are not all that complicated.
Better business model
Many advisers are moving to a
financial planning rather than product
recommending role. Prior to RDR, an adviser
might recommend a portfolio of investments
to populate, for example, a pension or an
Isa. Now, rather than recommending specific
funds, say, they are more likely to offer you
a comprehensive financial plan and help you
keep this on track as your life changes and
develops. This will involve recommending
a whole range of different products
and solutions, depending on what your
circumstances demand.
Many now have the ability to access
information on your products and investments
at the touch of a button. For example,
instant portfolio valuations let you know if
your plans are on track – or if any element is
underperforming – while detailed breakdowns
of the assets you hold, even when fund
managers are continually trading the
underlying stocks, mean you and your adviser
can spot and realign your investments with
your risk profile before any deviation gets out
of hand.
Higher qualifications
All financial advisers in the UK –
whether they are described as ‘independent’
or ‘restricted’ – will have to achieve a higher
minimum standard of qualification before they
are allowed to provide advice. This means an
increase in the basic level of knowledge and
will lead to a higher level of professionalism
for the industry as a whole.
Many advisers are using the changing
regulation as an opportunity to obtain
qualifications beyond the minimum standard
– for example to chartered or certified status.
Adviser clients should be reassured by these
new standards.
Also, as part of the changing charging
structure for advisers, you are likely to be
able to pick through a menu of different
advice options. For example, if you have the
confidence to run your own affairs but also
like to chat through issues on an intermittent
basis – much the same as you might do with
your solicitor or accountant – you could
perhaps just pay by the hour, ask the questions
you need to and then walk away.
Greater information and
transparency
In conjunction with other recent legislation,
however, RDR has specific rules about
how clients should be treated and what
information they should receive on an ongoing
Improved technology
Alongside the developments in
regulation and communication, developments
in financial-planning technology have taken
the industry by storm. In various areas, more
secure, more flexible and more user-friendly
Please note: This information is based on
Financial Services Authority publications
and our understanding of the proposals as at
January 2012. These may be subject to change
as they pass through the final stages of approval
and implementation into law.