UK RDR… challenges still exist and legislation still ongoing

Ten years post the Retail Distribution Review (RDR) in the UK, has it moved the dial? While more advisers may be correctly qualified; practice and advice models don’t seem to have shifted. What are the lessons that South Africa can learn?

FAnews spoke to Gillian Hepburn, Head of UK Intermediary Solutions and Global Asset Manager at Schroders about the above mentioned, and what the lessons for South Africa are.

RDR in UK, has it moved the dial?

Ten years post the UK’s RDR, Hepburn believes advisers are now better qualified, and they have a more professional industry. 

“RDR was also designed to move away from product-led advice to a more service-based model and to address the savings gap by encouraging more people to take advice. That said, closing the savings gap seemed to become less important as the policy development went on,” she said.  

“Adviser business models have changed to service-based and, while initially tiered, based on assets under management, we are now seeing a move to the segmentation of services based on life stage, which feels more appropriate. However, there is still a primary focus on advising older, wealthier clients. The pensions freedom regulation in the UK (where investors now have more control around the choices available for their pension at retirement) has driven much of this. Perhaps an unintended consequence is that we are seeing ageing client banks and fewer advisers (now only 39%) prepared to advise clients with less than £50 000 to invest. The adviser business model has also continued to develop to one not solely based on a list of services, but the delivery of holistic financial planning, taking account of clients’ financial goals and aspirations and how these can be achieved,” added Hepburn.  

This, Hepburn said, has also been coupled with a move away for many advisers from creating the investment proposition and anchoring their proposition on performance of the assets to the delivery of a service, something which was within the adviser’s control. We also started to observe the rise of outsourcing of the investment proposition to a third-party specialist - typically through the use of model portfolios and multi-asset funds. “Outsourcing, for many advisers, has enabled them to reduce costs and risk within their business, giving them more time to spend with their clients.” 

A key lesson and the challenges

A key lesson is, therefore, that the challenges around access to advice still exist and legislation continues to be developed. “For example, later this year we will see the introduction of ‘Consumer Duty’ which is likely to require advisers to think more carefully about what they are offering clients and making sure the client understands that offer – and also the value that advisers are delivering. This can deliver the opportunity  to explain the benefits of advice. Ongoing advice charges are also under pressure and advisers will have to better articulate their value to clients and the benefits of advice,” she said. 

“The UK regulator (as well as those in the EU) have also noted that too many people are holding cash rather than investing, and in an economy with rising inflation they can, therefore, be ‘causing harm’. This is also a challenge for the industry, and we need to educate people on the benefits of investing and enable them to access this advice at an acceptable cost to the client,” she continued. 

“We are also seeing new advice models emerging in the ‘direct to client’ market and hybrid advice where technology, in theory, should be able to help deliver lower cost/lighter touch propositions - particularly for earlier life stage investors, who typically have less complex needs. The key challenge here is that as wealth starts to transfer across generations and advisers continue to focus on their older, wealthier clients, they might find assets leaving their business at a point when they are trying to maximise valuations for an exit strategy. This is because research shows that 65% of those inheriting will not use their parents’ adviser,” she added.

SA can draw on experience from the UK

South Africa’s RDR legislation, with broadly similar ambitions and principles to that of the UK, is underway. Drawing on experience from the UK, how do we as an industry prepare and adapt to a rapidly changing regulatory environment? Plus, what are the implications, challenges and opportunities for South African platforms and providers? 

The challenge for platforms and providers, according to Hepburn, is the ongoing margin compression across the value chain and the changing client demographics with different requirements. 

“Platforms need to integrate better with other technology and tools used by advisers to reduce the re-keying of data and risk of errors, both of which cause inefficiencies in the adviser business. We are also seeing the introduction of online client portals or mobile apps where clients can access high quality, clear and transparent reporting. The focus on sustainability in the UK is also driving initiatives in this area, where the  positive impact of investments is easily visible to the client. This focus on reporting can deliver opportunities for countries where old fashioned, legacy approaches to retail customer communications still prevail. Moving away from paper-based communication to the use of technology can surely deliver more efficient and transparent communication. It can also help advisers to comply with disclosure requirements (e.g., existing EU requirements including PRIIPs) and also creates the ability to deliver tailored communications and in a way that suits the client,” she said. 

“Platforms will also require the ability to support a broad range of charging structures and technology to support lower cost investment solutions - for example, reduced dealing charges, fixed and flexible fees. The lack of fractionalisation for exchange-traded funds (ETFs) and even simply the availability of these and investment trusts can often be a challenge. The discretionary model portfolio market in the UK continues to grow with over 50% of advisers using an outsourced investment solution - 17% increased their use of outsourced solutions in the last year and 31% of advisers now outsource more than 50% of client assets. Platform technology in the UK has had to move quickly to support this trend and ensure that the discretionary managers can not only manage models easily, but that good quality data and reporting is available,” she added.

Challenges can deliver significant opportunities

Platforms, according to Hepburn, may also need to ensure that there are no barriers to customers who want to switch to access improved services or lower charges, and, in the UK, the regulator stepped in to ensure that this was actioned. 

“Lastly, we have also seen a rise in the UK of white labelled platforms and investment solutions which can only be delivered at scale if the technology can support the requirements. However, addressing these can deliver significant opportunities, particularly the ability for advisers to work with a broader range of clients delivering a range of service and investment propositions efficiently and cost effectively,” she concluded. 

Writer’s Thoughts
As Hepburn mentioned, the challenges around access to advice still exist, and legislation continues to be developed. We are also seeing new advice models emerging, the ongoing margin compression across the value chain and the changing client demographics with different requirements. Drawing on experience from the UK, what do you believe are the implications, challenges and opportunities for South African platforms and providers? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.