Being sustainable pre and post RDR
From the Retail Distribution Review (RDR) to fees and robo-advice, running a financial planning practice has become increasingly challenging as one tries to navigate through the sea of difficulties.
Unfortunately this is something that many have to tackle and in doing so, it is important to look at other business practices and models, both local and international, and to identify how to adapt methods to aspire to continued success.
UK’s biggest losers
With the above mentioned, Nucleus Group's CEO, David Ferguson in looking at how practices are adapting and succeeding globally said, in the UK the biggest winner from RDR has been the client, followed by advisers. “The biggest loser of RDR has been anything that’s commission-led.”
“Value for money (whether real or perceived) is now a much bigger driver than commission or other incentives. Incumbent companies aren't guaranteed to win - the share prices of Standard Life, Aviva and Old Mutual (three biggest life companies in the platform market) are down over 10 years. There's lots of opportunity for anyone who really has good customer outcomes at the centre of their business,” continued Ferguson.
“The post RDR market in the UK is fee-for-service driven. Financial advisers in the UK have become more like personal coaches and investment managers,” he stated.
On-going adviser fees, according to Ferguson, are plateauing, the march to passive continues (although quality advice is also winning) and platforms continue to grow by 20%+ per annum. “The overall direction is toward quality. Robo-advice seems to be failing, at least from a shareholder perspective.”
While PSG agrees with the conclusion David reaches, Ronald King, Head: Strategic Research & Support at PSG Wealth said it is important to note that RDR in the UK was limited to the investment arena.
“The cost and the risk of the process post RDR requires the adviser to focus on the client and to manage his needs and expectations. Most UK advisers have therefore outsourced their investment management to discretionary investment managers. Financial advisers had to focus on becoming financial coaches to clients and their families,” said King.
SA amongst forward-looking adopters
While South Africa is running a little behind the UK, Ferguson said it is running well ahead of others. “RDR-style regulation is becoming increasingly popular all over the planet so it's great to see South Africa amongst the most forward-looking adopters.”
King added while RDR in South Africa was built on legislation from the UK and infused with input from Australia, the South African regulator is taking Treating Customers Fairly (TCF) and RDR in South Africa much further than anywhere else.
“Here it also includes a total review of long term as well as short term insurance. Together with the six principles of TCF that was adopted, we are also moving to a twin peaks regulator where one will be responsible for the financial stability of the industry and the other for the market conduct,” he said.
“A strong trend that we are seeing in South Africa is that fines are becoming larger and more frequent. Anybody ignoring the new legislation will feel it in their wallet and might even lose their license,” said King.
“Competency requirements were increased in South Africa before it happened in other countries. The TCF principles and the RDR review are however, happening quite some time after the rest of the world. The benefit from that is that we can learn from their mistakes and build a system that creates a level playing field and ensures fair outcomes for consumers,” continued King.
Going forward in the advice space
Going forward, in terms of the advice space, client relationships, education and remuneration, Ferguson said, “ Focus on great client outcomes, be brilliant for fewer clients rather than just good for a large number, never stop learning and don't be afraid to increase your fee tariff - you add the most to clients' lives.”
King added that advisers will need to ask themselves what their value proposition is. “With the increased regulatory requirements the cost of providing advice and servicing clients will increase dramatically. To be able to charge the fees required to provide the service profitably you will need to have a strong value proposition. You also need to realise what services you are actually not getting paid for. One of them is the selection of funds. In the UK most advisers outsource their investment management and focus on the goals based advice they provide their clients. By developing a better and more coherent value proposition they have been able to increase their average fee income to 1%.”
“In addition to what is mentioned above, advisers will have to look at employing qualified personnel to provide the on-going advice required under legislation. Instead of getting a degree in investment management, studies on aspects such as investment behaviour could add more value. Automated advice and technology is required in each adviser practice. This will decrease the costs of providing services and advice, but also ensure an omni-channel experience that is required by the new consumer. Advisers need to change their practices from commission based to on-going fee based as soon as possible as the window to change is slowly closing,” concluded King.
Editor’s Thoughts:
While some believe RDR will be complex and costly, it is best to embrace it and prepare for it. It is all about being sustainable pre and post RDR. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.
