The RDR will bring sweeping change for the financial services sector. Many Financial Planners are ready but how are the product providers coping and what are they doing to ensure they remain fit for the future?
With RDR day less than 10 months away why is it so many providers from life insurers to fund managers are still keeping their cards close to their chest on the changes this deadline is forcing them to make?
Is their coyness for competitive reasons or is it because the providers simply do not have their game plans in shape?
“It’s a bit of both,” says David Cartwright, head of insight at research group Defaqto. “A lot of providers are not revealing their hands probably because they are trying to get the most value they can out of the old world. They are also trying to get themselves sorted out for for other challenges such as Solvency II and the European Gender Directive.”
Whether RDR delivers an opportunity or threat, the action providers should be taking behind the scenes is broadly similar. There are issues of adviser qualifications, developing platforms to allow easy re-registration and working out how to boost distribution if, as predicted, adviser numbers decline and firms consolidate. They also need to get their thinking caps on about how they plan to introduce adviser and consultancy charges to replace commission, programme their systems to deal with this and the tricky issues of legacy products plus decide how to sell to those who decide that they would rather not pay for advice. And for fund managers, there are decisions over how to price new share classes.
Nick Cann, chief executive of the Institute of Financial Planning, believes that “in some cases progress is slow.” He said: “Investment companies seem to be preparing share classes that allow for cheaper and more transparent charging and some companies are now even creating funds that are investing in cheaper asset classes to bring the costs down. For example, UBS launched a fund last October which focuses on cheaper costs through investing in ETFs and so on.”
Mr Cann believes that costs have now started to come into focus particularly for the active houses. He said: “Some of the more traditional bigger names seem to be putting off the inevitable of reducing the 1.5 per cent annual charge for as long as possible.
“The platforms are all pretty ready but are waiting for updates on regulatory drivers like cash rebates before they finalise their plans but many of these are evolving all the time.
“Platforms and life companies are also active in trying to help advisers with business transition.”
Phil Young, managing director of consultancy ThreeSixtyServices, believes providers’ biggest headache is handling legacy products. Mr Young said: “Those who have sold the most have the most to worry about in terms of dealing with applying adviser charges. It’s nigh on impossible to put in place charging facilities on all the old products. I’d say none of the providers can cope with the sophistication that would be needed.”
There is also a danger of a mismatch on RDR preparations. Planners who have devised their new charging strategies could find that providers cannot help them meet promises to their clients, believes David Ingram of Aim Two Three, a consultant to product providers. He said: “Most financial advisers want a flexible charging mechanism. A lot of it is about information technology but providers are only just waking up.”
Some providers will emerge from the upheaval facing legacy products better than others, Young believes. He said: “Not naming names but those who have sold a lot of regular premium business with a lot of trail commission will struggle more than those who did more single premium business. Another issue is if trail is shut off advisers are likely to start feeling differently about that company and may not do business through them in future.” Over at the fund managers, there has been a flurry of activity from on new share classes. Fidelity, for example, recently introduced lower cost funds to appeal to the cost-conscious investor. It offers versions with trail commission and without. Schroders, Rathbones and JP Morgan have taken similar steps. Others are hedging their bets on pricing, however. Mr Young said: “They don’t want to come out with too low a price in case none of the others follow.”
Fidelity has also been beefing up its FundsNetwork platform to respond to the expected demand from Financial Planners for discretionary fund management that will allow them to concentrate on client Financial Planning rather than making their own asset allocation decisions. It now has at least three DFMs on the platform.
Aegon is one of the few providers to keenly discuss its RDR preparations, albeit in general terms. Dominic Holmes, product propositions director, said: “For most of 2011 we stayed quiet. It led to some comments about whether we would be ready so we took the decision to be bold about opportunities to talk to the press about it.” He confirms the insurer has had a ‘cross- functional’ team beavering away for some time on issues from charges to technology. Mr Holmes says the group remains committed to the financial adviser channel and as such has offered free support to planners, including through its Business Brain micro site, which offers advice on how to maintain a profitable business model under RDR.
The provider has also joined with Friends Life, Legal & General, Prudential, and Scottish Life (co-ordinated by Deloitte), to sign up to a set of common principles and processes regarding consultancy and adviser charging - although the details of the charges are yet to be announced. Mr Holmes says more will be revealed on Aegon’s charges in the fourth quarter of 2012.
However, he says the group’s Retirement Choices platform is already RDR compliant, with a pilot currently operating with 50 adviser firms. Mr Holmes said: “It’s received a very good response so far.” Mr Holmes added: “There’s a game of poker about readiness for RDR. Some providers are holding back because of the uncertainty about legacy commission. Once there is more clarity they will give a complete view rather than just a new business view.”
Aegon has no current plans to offer a platform direct to investors but is keeping an open mind on other opportunities. Mr Holmes said: “We are aware that the restricted advice model will be popular too so we have been speaking to all different sizes and shapes of adviser over the last couple of years.” And if the banks take a big share of the lower value end as anticipated, Aegon won’t ignore it. He said: “If there’s a role for us, then we’ll look at it.”
AXA Wealth has also been seizing opportunities and in preparation has introduced a new management division to focus more closely on its adviser relationships. David Thompson, managing director, marketing and distribution, said: “This means that advisers will have a dedicated partnership manager who will provide a single point of contact. We also have a targeted focus on new business development through identifying and working with distributors with an investment and partnership philosophy similar to our own. There will also be a new team solely dedicated to developing our large corporate partnerships.”
The company also recently announced its new AXA Self Investor direct platform, which will be piloted by a number of advisory firms over the next six months in the lead up to the RDR. Mr Thompson said: “Built on an ‘easy to invest’ principle for clients who do not necessarily require a full financial advice offering, the service can be white-labelled which will enable IFAs to brand it in their own livery.”
The group is also offering support for planners through its Professional Edge service, which amongst other things arranges workshops for advisers and works directly with firms wanting to change their business models in the run up to RDR.
The RDR regime holds no fear for AXA and it sees the changes as an opportunity. Mr Thompson said: “The emergence of the RDR has explicitly requested that fees are no longer shown in bundled charges, but instead through a transparent structure. Additionally, an increasing number of advisers are opting to outsource their investment needs to an investment provider, which offers a full compliant, monitored and robust solution, and an efficient investment platform. AXA Wealth is one of the few players in the market that can offer both investment platform and investment management services.”
Mr Thompson says the explicit charging structure on its Elevate platform is already ‘RDR ready.’ He said: “Under Elevate’s composite structure, where applicable, trail commission on new business will cease to be paid to advisers and will be returned to the client. Advisers will then be able to use Elevate’s adviser charging tools to facilitate customer agreed remuneration.”
As with others AXA Wealth plans to “exploit growing interest in restricted advice, building on our existing propositions and bancassurance experience,” he said. The FSA’s recent legacy paper, published in February, and suggesting trail commission can continue for certain products where only fund switching takes place, seemed to prompt further procrastination for providers, rather than an acceleration of their decision- making.
Ross Easton, head of proposition implementation at Standard Life, said: “We are currently analysing the impact of the proposed legacy rules on our systems and processes and what this means for the payment of trail commission on these products.” Standard Life is silent on post RDR charges. Mr Easton said: “We are currently finalising our position on share classes and pricing and we will detail these to the market in due course.”
Confirming, however, that financial advisers will remain its ‘core channel post-RDR’ the group says it offers them support. Mr Easton added: “We like to think of our service to IFAs as a business consultancy and we’ve been working with them to help evolve their business models to get ready for RDR for some time. We’ve held numerous events and seminars to support IFAs. And these have ran alongside Standard Life Investment’s Learning Gateway, which since its launch in June 2011, has seen over 3,000 intermediaries, Paraplanners and wealth managers registered.”
At BNY Mellon, education is one element of the asset manager’s three-pronged approach to RDR preparation, which also includes dealing with independent and restricted advice issues plus fees and adviser business models, according to Scott Goodsir, director of wholesale.
Mr Goodsir said: “With so many IFAs in their 50s there were some who had not sat exams for a long time so in 2010 we began offering help with online tools and roadshows to get advisers up to speed for RDR. We are currently helping with gap filling especially on derivatives. This is important for us as we own asset managers Insight which is one of the largest users of derivatives in the UK.”
He added: “We think there will be a vast number of firms who will move to the restricted model. It is quite onerous for advisers to deal with the whole of the market. Even those who move to this model must still look at the whole investment landscape and make sure they have the correct products too so multi-asset type products and discretionary fund management will feature.”
Details of BNY Mellon’s full pricing structures have yet to be finalised. He said: “We have had an RDR steering group for three years. Our latest meeting was discussing our pricing model and what share classes we will have. We want to have a new 1 per cent AMC share class - that’s the 1.5 per cent with the 0.5 per cent trail taken away. A lot of providers have talked about platform share class of 0.75 per cent. We’ll make a decision on that in the next few months.”
Newer players on the block with open architecture products appear to have fewer concerns in the run up to RDR, such as Hornbuckle Mitchell, the Sipp provider. Stewart Dick, head of sales, is confident that his company is on track for a smooth transition. He said: “On the product side we have always been RDR ready. Our Sipp and Ssas are flat fee and very transparent. It’s been very easy and in terms of remuneration as we don’t pay commission, in the traditional sense anyway.” Hornbuckle, which plans to remain focused on the IFA market, says it has also been working on helping advisers with their qualifications. Mr Dick said: “We have been working with the Institute of Financial Planning and the Chartered Insurance Institute on gap fill.”
Mr Dick admits that price is going to be a big issue post RDR but he is relaxed. He said: “Our charges have been the same for the last four years. We have managed to keep them down by keeping our back office efficient.”
Over the coming months, the game of poker is likely to continue, with few players putting their full hands of cards on the table because of the competition and the FSA’s tinkering with the rules. As Mr Young of ThreeSixtyServices said: “The FSA is still noodling around with the rules and every time you look at them more gremlins appear when you apply it in the real world.”