Retail Distribution Review in the UK – not everyone has won

David Ferguson, Nucleus UK CEO.

The Financial Services Board (FSB) is set to adopt a Retail Distribution Review (RDR) – based on the RDR model implemented in the UK – in South Africa to regulate financial advisers and to ensure that customers receive fair outcomes. In the UK, RDR has transformed the adviser market since it was introduced in January 2013, but not everyone has won, Nucleus UK CEO David Ferguson said last week.

Speaking about the evolution of financial advice in the UK at the Investment Intel conference hosted by Glacier by Sanlam and Sanlam Investments in Cape Town, Ferguson said the introduction of RDR in the UK had followed a slow process of change in that country’s adviser market since 1984. “While regulation and specifically RDR almost certainly accelerated this process, almost all the changes were commercially led – some on the back of technology developments, and others in response to changing customer behaviour and expectations.”

The evolution of financial advice in the UK saw the transformation of advisers from commission-based product sales people to fee-based financial advisers and even financial therapists, with the customer firmly at centre stage, Ferguson said. As more and more advisers moved to fee-based models, the Financial Services Authority (FSA) in the UK took steps towards the implementation of RDR, following six years of industrywide consultation on advice models, adviser professionalism and ethics, fee disclosure and investment platforms.

“The really deep transformational change in the UK adviser market wasn’t about a product, or about a platform. It was initially a kind of movement consisting of the smaller financial planning firms. These advisers can act in concert with their customers to create combinations which are very effective for these customers, who are generally well-informed. The winning advisers realised that this was key to the market,” Ferguson said.

He said an issue the financial services industry in the UK was currently grappling with was a lack of solutions for consumers unable to afford fee-based financial advice. “The adviser market has done very well through its own transformation, but consumers can be left adrift if they don’t have resources or sufficient assets to pay for financial planning.”

Another consequence of industry transformation was a marked decrease in the number of financial advisers in the UK. “In 1984, there were around 400 000 advisers. This number fell to 50 000 in the year 2000, and 35 000 when RDR was introduced in 2013. The number has now dwindled to 21 000. Some advisers have left the industry as they can’t meet the required standards of professionalism, and some are simply unable to operate within a more transparent model.”

Ferguson said although the advice market in the UK today was narrower, it was also materially stronger. “Advisers that are thriving have completed the journey from being product-led to being customer-led. Advice is now based on client proposition, not on product.”

The adviser business model has also undergone dramatic changes – whereas a typical adviser 20 years ago may have accumulated around 1 000 clients over a period of several years, the default today is one adviser per 100 clients. The service provided to these clients is more professional, more tailored, and more long-term than in the past.

“Our story has unravelled over 30 years, and it really has been a once-in-a-lifetime opportunity for financial advisers. It has been a story about the customer, and about technology, but ultimately also about accountability and authenticity.”

Ferguson said financial advisers who had changed their advice models early on had achieved the most success, and urged South African advisers to follow this example. “They had happier and more engaged customers, and built more valuable businesses, because they chose to put the customer first long before they were told to do so. Changing the advice sector to work better for you and your clients is a huge task, and it is hard work. It is, however, hugely rewarding,” he concluded.

Commenting on the implications of the UK RDR experience for South Africa, Glacier by Sanlam’s Head of Business Integration, Jean Lombard, said that although we’re still at the beginning of our journey, we’re in the fortunate position of being able to learn from the UK experience. “We still await finalisation of the details of the regulation, but there’s been robust engagement between the regulator and industry for a while now, to ensure that we uphold the professionalism and sustainability of the financial services industry,” he said.

According to Lombard, RDR has had a significant impact in the UK and we can expect to see similarities play out in our own market too. “Ultimately, clients want good advice that they can afford and products that meet their needs. The long-term benefits of getting this right will include more trust in the industry, which will ultimately lead to a stronger savings culture,” he concluded.