The Retail Distribution Review (RDR) has been in effect since 31 December 2012. It was launched by the previous financial regulator, the Financial Services Authority (FSA), in 2006, with the goal of transforming how individual investors pay for financial advice and the financial relationship between product providers and advisers. Adviser charging is a key feature of the review, a new model under which advisers are not paid commission anymore and now recover fees through directly charging clients, in a bid to ensure more transparency and fairness in the investment and financial advice sector. Because of this, the financial services sector has had to review its business models and how the changes would impact them.

Cindy Chan, partner and lead for retail conduct and governance at Deloitte UK, talks through the impact of RDR on business models since 2012 and discusses how a business can add value in a post-RDR world.

Before RDR was implemented, what were the expected changes in the sector in terms of business models?

Pre-RDR, many firms were concerned about the impact the changes would have on their business models. For example, whether investors would be willing to pay explicit initial advice charges and the level at which these should be set. There were also challenges around how to treat ongoing trail commission on pre-RDR assets – particularly the value investors would receive in return of the trail payments from providers.
What has changed since implementation?Since the RDR, business models have changed in many ways. For example, the requirement to pay an explicit charge for financial advice has made the costs of advice more transparent. This has helped make the costs of each step in the investment value chain clearer as consumers can more clearly determine the cost of advice, the platform and underlying investments.

The RDR has also meant there has been a switch to adviser charges that vary between firms and has influenced some firms to focus on more high-net-worth clients. Post-RDR, some firms sought to define minimum investment values to target profitable target segments, for example, £100,000 minimum investable assets and tiered charging structures where the percentage charge is reduced for higher value bands such as £250,000, £500,000 and £1m+. While other firms have adopted hourly fee rates which must be paid irrespective of whether their customer proceeds with an investment, it is still common for firms to charge on a contingent basis, where the advice fee only becomes payable if the customer proceeds with an investment.

We have also seen larger firms seeking to capture more of the investment value chain by adopting vertically integrated business structures, such as providing advice in respect of their in-house funds. This has led to an FCA focus on how such firms manage conflicts of interest.

The RDR-approved level 4 CISI
qualifications are:

Investment Advice Diploma

Private Client Investment Advice & Management (with gap fill)

Chartered Wealth Manager Qualification

The implementation of the RDR has also helped facilitate the proliferation of platforms within the sector. Many advisers use platforms as a convenient way to meet some of the RDR requirements. Platforms allow for efficient facilitation of initial and ongoing adviser charges and also enable advisers to produce periodic reports on portfolio performance, helping them to deliver ongoing service reviews with clients. Due to their bulk buying power, the cheapest RDR-compliant ('clean') share classes are generally available through the large platform providers. 

Platform technology has also assisted in making the annual review services advisers offer easier to administer, as much of the investment reporting and costs/charges disclosures can be done via platform technology, a cost paid directly by the customer.
How have businesses added value since RDR? The RDR has led to a new generation of firms being more focused on building lasting client relationships. Advisers undoubtedly focused on long-term relationships with their clients before the RDR came into effect, but it has led to more commercial considerations. For example, where firms have introduced minimum investment values for services or tiered service levels, clients in a lower service tier may receive an annual review via telephone, in comparison to clients in a higher tier who may have access to one or two face-to-face meetings annually. 

It has also increased transparency, with firms clearly explaining their services and the associated costs. We now see firms focusing on how to prove their levels of service are what they promise to customers.
What’s changed for the consumer?There is now access to higher-qualified financial advisers, as all advisers have a minimum level 4 diploma qualification. Advancements in platform technology mean that investors can engage with their investment performance and see the impact of costs and charges on their investment portfolios.

However, the macroeconomic environment poses some challenges to consumers and the risks of poor customer outcomes remain. In particular:

• The financial choices facing consumers have become more complex. A good example of this is the introduction of pension freedoms in 2015, which resulted in the removal of the need to purchase an annuity to provide income at retirement and led to increased investment choices. This has caused a significant increase in the number of people taking on investment performance risk once they stop work. With an ageing population, making the correct investment choices at retirement are more important than ever. The FCA Retirement outcomes review, published in June 2018, reports that between October 2015 and September 2017, over a million pension pots were accessed using pension freedoms. Prior to pension freedoms, these pension pots would historically have been annuitised.
• The focus of the FCA's attention on consumer outcomes has evolved since the implementation of the RDR. While the RDR helped to remove the conflicts of interest that existed through providers paying commissions to distributors, different conflicts have emerged for vertically integrated business models where a group owns both the distribution channel and the product provider.
• There are still instances where the FCA identifies poor consumer outcomes, with notable recent examples including defined benefit pension transfer advice and also high-profile issues with fund liquidity.

How has it affected the advice gap?Implementation of the RDR has not solely contributed to the onset of the advice gap. Any consideration of the advice gap should be taken in conjunction with other factors that may have resulted in consumers not taking advice, for example, low consumer confidence or awareness of financial services. The FCA's Financial advice market review, published in March 2016, reports that the vast majority of respondents believe that advice gaps exist, with most believing that a gap exists for people on lower incomes or with lower levels of assets who can't afford to pay the fee for advice or don't have access to advice. "A number of reasons were cited for this gap, including supply-side issues ('not enough advisers to go round' or 'too many advisers looking for wealthy clients to the detriment of the majority') and consumer engagement issues," the review says.

About the expert

Cindy Chan, partner and lead for retail conduct and governance at Deloitte UK, has over 20 years of financial services consulting and audit experience. She has extensive experience in supporting firms in regulatory risk assurance reviews and conduct risk projects including complaints handling, product development and governance, sales and suitability assurance, as well as Section 166 Skilled Person reviews and enforcement cases.

Have any other regulations since RDR impacted business models? The most notable change is the second Markets in Financial Instruments Directive (MiFID II). From a structural perspective, MiFID II has had a greater impact on the asset management and investment banking sectors. However, the regulatory framework that evolved in the UK under the FSA and FCA (including the RDR) has meant that the implementation of MiFID II has had less of an impact on distributors in the UK than in other European markets. This is due to a combination of existing guidance the FSA had implemented and the RDR changes relating to incentives, as well as the banning of commission payments from providers to distributors.
What do clients really value – and how can this be communicated? In Deloitte's experience, consumers value having access to face-to-face advice and having an ongoing relationship with their advisers. However, this can be expensive, and the costs of financial advice have not reduced as a result of the RDR. 

Opportunities also exist for firms to offer lower-cost advice, primarily through automated solutions. In 2017, Deloitte issued a paper called The next frontier: the future of automated financial advice in the UK. This includes a survey of 2,000 consumers and concludes that the UK offers a rich opportunity for automated advice, with more than a third of respondents showing a willingness to pay for an automated advice solution.