Lessons for SA from UK’s RDR

• “The reforms are more than an evolution, they are a revolution.” • “Embrace RDR as soon as possible or risk lagging behind competitors.” • “Wealth managers and advisers are expected to engineer compliance efficiency into their businesses.” • “There will be opportunities for those who can provide direct-to-client online platforms.”

Darren Zaman, chief executive officer of Brooks Macdonald International, addressed the Momentum Investment Summit held in Cape Town on 12 November, discussing the evolution taking place in wealth management.

Zaman said the reforms are more than an evolution, they are a revolution. Multiple forces of regulation, technology, market risk, politics and demographics are forcing the financial services industry to adapt.

The biggest driver of change is regulation, especially the Retail Distribution Review (RDR), which is being rolled out globally. The UK has implemented it and South Africa will do so in 2016.

Zaman believes the UK’s experience can help South African businesses benefit from the RDR. He advised the industry to view the RDR as an opportunity, not a threat. Early adopters of the RDR in the UK prospered. Zaman said advisers should embrace the RDR as soon as possible or risk lagging behind their competitors.

Transparency is a big feature of the RDR in terms of revenues and relationships with clients across the value chain from wealth managers to advisers.

The effect of the RDR is that advisers will only earn money if they charge a fee for professional advice. This means advisers will need to develop an advice proposition that customers will value and be prepared to pay for.

Zaman believes the RDR will improve advisers’ relationships with their clients, as it clearly delineates the roles of advisers and investment managers. Clients will be able to see what fees they pay and the effect of fees on their investment returns as opposed to paying commission.

In the UK, the RDR gave investment managers an opportunity to review their product design and create a line of products with the necessary transparency for clients and advisers. The industry has an opportunity to revitalise its reputation by emphasising transparency across the value chain.

A potential issue for South Africa is what Zaman terms the “advice gap”. Investment managers will need to segment the market by value to offer a range of solutions and service levels for various client segments. In particular, providers must be mindful of lower income segments that may no longer be able to afford financial advice. In the UK, smaller clients exited from their adviser relationships while advisers flocked to offer their services in the affluent and high-net-worth segments.

The RDR requires further and continuing professional development. Zaman pointed out that South Africa’s existing financial advice is already of a high standard. However, South Africa is short of skilled advisers. Therefore, it is particularly important that advisers embrace the increased professional qualification requirements to ensure they are not locked out of the industry. For this reason, Zaman expects that South Africa’s requirements may not be more flexible than the UK’s.

Zaman said that just as the UK is finalising the RDR implementation, there is already more legislation in the pipeline, including rules to enforce the RDR. Wealth managers and advisers are expected to engineer compliance efficiency into their businesses.

The UK is about to implement the Markets in Financial Instruments Directive II (MiFID II), which demands stronger protection for investors and clients' investments and will require extensive system changes across the industry.

Zaman said the industry faces constant challenges and can expect constant change. For instance, the wide adoption of technology puts pressure on businesses to create a solid and responsive presence on these platforms. Social media gives individuals knowledge and reach, making it a potential threat to the industry as well as a possible benefit. The financial services industry needs to protect itself and its clients from issues such as increasingly sophisticated cybercrimes and new crypto-currencies.

Zaman said that disintermediation of those who cannot, or will not pay adviser fees, created a need for self-help advice, which saw an increase in online advice. There will be opportunities for those who can provide direct-to-client online platforms with slick reporting, like Nutmeg in the UK.