With the Retail Distribution Review proposals now largely clear, advisors and financial firms should start getting ready for fundamental changes in the distribution channels for retail financial products across various sectors, such as pensions, insurance, banking, and wealth management. Resistance is futile, says Duncan Jefferies, as the early movers will gain first advantage

Most people chiefly remember June 2006 as the month when England crashed out of World Cup in Germany, triggering a flood of tears from captain David Beckham. But for independent financial advisers (IFAs) it is also memorable for another event, which will drastically alter the future of the retail investment sector: the launch of the Retail Distribution Review (RDR). This aims to bring a new level of professionalism to the retail investment market, doing away with the current commission-based system for financial advice. The Financial Services Authority (FSA) hopes that when implemented in 2012, it will restore public trust in an industry that has occasionally been marred by the mis-selling of financial products and an inconsistent quality of service; the payment protection insurance (PPI) scandal just being the latest example.

With two years to go until implementation, the key elements of the RDR are now largely in place. The clear aim is to establish a stronger 'advice' market that is demonstrably on the side of the consumer, as against a 'sales' regime focused on volume. The market will be split into independent and restricted advice segments. Independent advisors will have to review the whole of the product market, while firms providing restricted advice will need to disclose this to the customer, along with the range of products they advise on. Remuneration packages will naturally be revolutionised as well.

An industry consultation document entitled Distribution of retail investments: Delivering the RDR (09/18) was released last June, expanding upon the FSA's proposals for ensuring:
• Independent advice is truly independent and reflects investors' needs
• People can clearly identify and understand the service they are being offered
• Commission-bias is removed from the system, and recommendations made by advisors are not influenced by product providers
• Investors know how much advice is going to cost and how they will pay for it
• Investment advisors will be qualified to the government's Qualifications and Credit Framework (QCF) Level 4.

Peter Jolly, assistant director, consumers and distribution reform, at the Association of British Insurers (ABI) trade body, asserts providers all welcome greater professionalism for the industry. "Everybody out there would say that we need to get consumers onside by demonstrating we have a very professional industry," he says. "And as a whole the industry welcomes the greater transparency, particularly the split between an advice charge and product charge, which should help customers better understand what it is they're purchasing."

Pauline Stoffberg, head of UK life insurance at the Accenture consultancy, says many providers have now come to grips with the fact that they need to improve their relationships with their customers. "We see a change of focus from 'how do we best serve our IFAs', to something that is more customer-centric. That's probably the biggest change I've noticed over the last year."

Setting the standard
A second consultation document released by the FSA on 16 December 2009 also provides clarity on the standard of qualification required in a post-RDR world. After lobbying from IFAs, work-based assessments and oral exams that meet QCF Level 4 can now form part of the assessment process.

"That reflects the fact that there are a large number of people in the industry who have been there for a long time, and might well be extremely competent," says Simon Clamp, managing director of Friends Provident. "They may have been practicing for 25 years, but might have some element of difficulty with the exams. I think the FSA have now recognised that fact."

But the FSA has refused to budge on the question of grandfathering; you can't just ignore the professional standards required. As Accenture's Stoffberg says, "everyone is going to have to qualify in some way."

According to Stephen Gay, director of business development at Aviva, telling IFAs they need to return to their studies is something a lot of them do not want to hear. "What some of them don't understand is that the whole world has become more professional. I had one IFA write to me not so long ago saying 'you just want us to be like accountants and doctors', and I thought 'No, it would be good if you could get up to the level of policeman and nurses'. Both of those professions are already at QCF Level 4."

The FSA intends to create an in-house standards board, rather than an independent body, which it hopes will save money and reduce complexity when enforcing the RDR. However, the ABI's Jolly believes this should only be looked at as a starting point. "The FSA themselves recognise that this is up for review at some point in the future, and maybe an independent professional standards board is the way to go longer term. But to get it up and running in the timescales that we've got, and to keep the costs to a minimum while we develop it, it makes sense to keep it in-house. The FSA don't always get it right, but this time round they've been pretty pragmatic about things."

Aviva's Gay was disappointed that the FSA decided not to pursue an independent standards board, "but that doesn't necessarily mean it shouldn't be effective. The important thing is that we move away from thinking that it is sufficient to simply regulate a firm, because that had allowed sub-standard advisors to migrate between firms, leaving their debris behind them."

A new system
The FSA is concerned that product differentiation is currently often based around the amount of commission that's paid. "We want to move away from that to a world where for the product provider it's about the features of the product, the charges that they pose, and therefore the reduction in investment returns that consumers can reasonably expect," says Peter Smith, head of retail investment policy at the FSA.

A small but increasing number of advisory firms are already operating in a way that fits in with the RDR's proposals. "They're already charging fees, for example. But clearly some other advisory and provider firms will need to do some further thinking about their business models."

Focus Solutions, a provider of multi-channel distribution solutions to the financial services industry, recently launched a new Remuneration Management module for its Focus:360 degree solution, aimed at helping firms make the transition. Through the new module, adviser firms using the software will be able to devise and operate a range of consumer agreed charging models from a single platform, which supports the entirety of their business. This will allow them to reconsider the way they charge customers prior to the implementation of the RDR.

"From an IFA and an intermediary perspective, we're seeing a major refresh of front and back office systems at the moment," says Darren Bayley, proposition manager, Focus Solutions. "There are a couple of reasons for that. When the larger firms are looking to consolidate, can their existing systems scale? And are they using the traditional IFA software, which is based on legacy technology that hasn't been upgraded?"

The ABI's Jolly says different providers are currently at divergent stages in their preparation for the post-RDR industry. "Some have already moved a long way toward the model being proposed, so they have wrap platforms (a portfolio management tool) or products that are fairly easy to move to the new remuneration model; others haven't moved over yet."

Accenture's Stoffberg can easily envisage a future where traditional face-to-face contact with an IFA is no longer the number one route for customers looking to purchase investment products. Instead, an integrated distribution model that allows people to seamlessly toggle between a mobile device, PC, telephone, internet and branch services is likely to be the norm. "What does that mean for providers? It means most of them aren't ready."

In future IFAs could also provide their clients with direct online access to portfolio records, with near real-time valuations. "They're looking to expose the data directly to the consumer through a secure portal," says Focus Solutions' Bayley. "You might update your fact finding information prior to seeing a financial advisor, or request a meeting, or even review how your portfolio's performing against a number of industry benchmarks."

The right price
Clearly large swathes of consumers don't understand that they are paying for advice now; they do not think of it as part of the cost of the financial product. It's these individuals who may fail to engage with the new market proposed by the FSA, not being willing to pay for something they previously considered free.

"They'll be able to afford it," says Aviva's Gay, "because they're already paying for it. Whether they're prepared to pay for it separately is a different matter. Advisors will need to stop thinking that simply using the word independent says it all. They've always said 'that's the value isn't it'? Well no, it's not actually. It's the range and quality of the services, and those need to be explained to customers in a way that means they can see it's worth paying for."

The ABI's Jolly worries there could be a gap in the market. "The key area we think is missing at the moment is some form of simplified service for mainstream consumers; straightforward products that don't need someone with a QCF Level 4 qualification to service them."

"I think the difficulty will be for the industry to focus on the correct product set and make it economically viable. There's always a difficulty in that you'd like to include all products in that because it gives you the most scope from a commercial perspective. But the reality is that is has to be aimed at a segment of consumers with simple needs."

There are other issues still to be addressed. The FSA's proposed ban on factoring, set out in the June 2009 consultation paper, has been criticised by some industry professionals. Factoring means providers pay upfront fees to advisers and deduct them from the product over time. Aviva's Gay argues that a ban on factoring for regular premium products will make advice costs disproportionately large for consumers. "Without factoring I can't see how we can encourage regular savings to recover," he says.

But those who hope the Conservatives will halt the progress of the RDR if they win the upcoming May 2010 general election are likely to be disappointed, says Friends Provident's Clamp. "We need appropriate regulation for the retail advice space. My expectation is that we will still see the RDR in some format, regardless of who forms the next government."

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