RDR: winners and losers
by David Ferguson | CEO of Nucleus Financial Group on behalf of Sanlam Investments
Four years in, we take a look at how financial advice models evolved in the UK.
With the Financial Services Board’s Retail Distribution Review (RDR) regulations looming, South Africa’s intermediaries are understandably nervous. However, in the experience of the UK’s David Ferguson, the local investment community has nothing to fear – as long as we embrace the priorities of RDR, which are to put the client first and take full responsibility for professional financial services and overall practice.
Ferguson, CEO of Nucleus Financial Group and Scotland’s fintech envoy to the UK Treasury, was speaking of behalf of Sanlam Investments recently.
In the days just before RDR was introduced in the UK four years ago, there was a lot of doom and gloom about RDR driving advisers out of the market, but to the contrary, the UK saw the opposite happening: advisers and clients have been the winners, while those not adapting got left behind.
Nucleus was built as the UK’s first collaborative and adviser-led platform, which meant Ferguson and his team had a seven-year head start on their competitors, many of whom battled to come to terms with RDR when it was introduced in the UK four years ago.
Ferguson said a major problem with any established financial advisory service is that ‘they are not paranoid enough’. This meant many players were simply out of their depth when it came to providing unbiased advice and open platforms that were not tied to commissions and kickbacks, and all the additional layers of fees that were then dumped on clients. When regulatory change came, they realised to their loss that they had not planned ahead.
Commission-dependent advisers were not the only losers – distribution channels, insurance companies, retail banks and active-strategy fund managers all felt the heat. The trickle-down even affected trade media and an entire ecosystem, such as event management, that fed off fees. Ultimately, the mass market found it could no longer afford commission-led advice. Net inflows shrank. It was lose-lose, all round.
‘The reason for all those failures is because RDR is driven by providing value for money, and old-style practitioners were not delivering it,’ said Ferguson. ‘The losers didn’t get on the bus. The traditional model was sales first, less support. RDR has simply flipped the model on its head.’
Ferguson said the implementation of RDR in the UK forced advisers to charge a negotiated fee for their service, and rebuild their practice around the customer.
‘It became easy for start-ups to enter the industry, because everybody had to conform. There were no more soft commissions or conflicts of interest around switching products or providers. Charging structures were more transparent – it was a whole culture change that was intended to put the customer’s ongoing needs first.’
The real beauty of the process, Ferguson said, is that it is simple. All an adviser really has to do is connect people to the markets, and bill according to a fully disclosed, upfront fee. ‘We realised it was not only more effective in terms of results and customer satisfaction, it was more cost-effective for the adviser.’
In the UK, the nuts and bolts of the RDR process meant, firstly, that initial fees disappeared. Instead, a fixed fee for a plan was agreed with the client – for example 183 basis points (bps) of the lump sum investment. Of this, the adviser takes 81bps, the fund manager 53bps, and the platform provider 33bps. Additional (previously ‘hidden’) costs for administration and sundry expenses – now borne by the adviser – make up the rest. ‘You can’t charge extra for value-free stuff such as your back office or risk profiling,’ said Ferguson.
The upshot is that clients always know, upfront, where they are invested based on agreed targets, what they are being charged, and where and how their payments to the adviser are allocated.
Ferguson said it was clear to see who in the UK had best taken advantage of RDR. ‘Winners care intensely about client outcomes. From having 1 000 clients with shallow relationships, they now have perhaps 100, which means more of an emphasis on personal coaching and less on products and investment management. Sales and commissions used to be the hero – RDR now provides a far more structured client experience. The centralised investment process delivers a much more effective solution to the client,’ said Ferguson.