The Retail Distribution Review was brought in to give customers greater protection and confidence in the advice they receive, following scandals such as the mis-selling of payment protection insurance. In the words of Nick Elphick, the managing director of specialist products at AXA Wealth, “One of the key drivers behind the RDR was to establish financial advice as a profession akin to solicitors or doctors and as a credible financial support network.”

The Retail Distribution Review was brought in to give customers greater protection and confidence in the advice they receive, following scandals such as the mis-selling of payment protection insurance. In the words of Nick Elphick, the managing director of specialist products at AXA Wealth, “One of the key drivers behind the RDR was to establish financial advice as a profession akin to solicitors or doctors and as a credible financial support network.” 

As the industry adapts to the end of trail commission and the RDR puts a further squeeze on profit margins, the prospects for wealth managers in the sector look uncertain. Since the launch of the RDR in December 2012, a firm must disclose its charging structure in writing and, where possible, in cash terms. 

THE VALUE OF PREPARATION 

The whole exercise has driven up both compliance and non-compliance costs. It has also forced customers to re-evaluate the uses of seeking advice because this is the first time that they have fully appreciated the costs they are paying, according to Peter Moores, chief executive of Raymond James Investment Services. His firm seems to be one of the beneficiaries of the RDR, having prepared for the changes in advance. He told WealthBriefing, the sister publication of Compliance Matters: “Every year our market share is increasing and that is in part due to the way we price our services. As we rebated trail from fund groups we never developed a dependency on it, which meant it did not impact our business as we always agreed with our customers how and when we charged them.” 

Assets also increased for Architas, AXA Wealth’s specialist multi-manager business, rising 17 per cent from £10.8 billion to £12.6 billion in the six months to June. AXA said that Architas introduced clean share classes in preparation for the RDR, with 78 per cent of new business now going into these funds. Additionally, the popularity of the risk-rated funds has led to them being added to a number of leading wrap platforms. This growth helped increase AXA Wealth’s overall assets by 21 per cent from £20.0 billion to £24.3 billion over the same period. 

HIGHER COSTS BUT PROFITS ELSEWHERE 

Some wealth management firms are doing well despite the RDR. London-listed wealth and investment management firm Brooks Macdonald reported 45 per cent growth in its funds under management for the year to June. It said that ahead of the RDR it had fixed its managed portfolio service fees at the same level across new and existing funds. As a result of the RDR, it reported that compliance and regulatory costs had “increased significantly”, yet this was far from ruinous for the group as a whole. 

MORE INVESTORS TO COME? 

There may be other good news. In July AXA Wealth’s study, conducted by YouGov, interviewed 2,070 consumers and revealed that 19 per cent of them had never sought financial advice but intended to do so for the first time to ensure that they had enough of an income for their retirement. It found that 40 per cent of British adults were not confident about their ability to manage their own finances for that purpose. It also revealed that 16 per cent of consumers had already sought professional advice in the past and planned to do so again, with 19 per cent who had never sought financial advice saying they would do so in future. 

CONSOLIDATION IN THE FIELD 

Others have lagged behind. A number of recent surveys have revealed a wave of consolidation amongst firms. A report released by Fidelity in June found that almost two-thirds of British advisers thought that the RDR had led to an increase in outsourcing their investment portfolio management, with the majority expecting to increase their use of managed fund solutions and model portfolios as a result. According to figures from the Association of Professional Financial Advisers, ahead of the RDR the number of financial advisers fell from 26,339 in December 2012 to 20,453 as of 1 January 2013. 

QUALIFICATIONS ARE ON SCHEDULE 

Research conducted by RS Consulting, meanwhile, has found that six months after the introduction of the new rules, 97 per cent of advisers have the right level of qualification, with the final three per cent studying within the time-scales permitted by the rules. This contrasts with 2010, when less than half of all advisers were qualified to today’s standard. 

THE ADVICE GAP AND THE ADVISOR GAP 

The field is full of conflicting information, however. The RDR has been widely criticised for creating an “advice gap”. This gap is said to consist of people who will cease to use advisers because they are unable or unwilling to pay the higher fees for regulated advice. A report published in January by Cass Consulting and Fidelity Worldwide Investment suggests that as many as 43 million Britons, who have an investible wealth of £440 billion, could fall into this gap. Research by Deloitte in December 2012 estimated that 5. million people could stop using financial advisers as a result of the advice gap. Deloitte found that customers most likely to exit the adviser market were from the mass market (2.4 million), mass affluent (2. million) and affluent (600,000) segments. The RDR, it is generally accepted, has priced many consumers out of receiving independent financial advice, turning them into “orphan” clients. 

Along with this phenomenon comes an “advisor gap.” Eddy Reynolds of Standard Life told WealthBriefing: “We believe there is also an adviser gap to service higher-net-worths, particularly those among the baby-boomer generation approaching retirement. In other words, more people than ever before will be in need of financial advice but there will not be enough advisers available to help them.” Set against this, the FCA has just brought out figures that suggest that the number of advisers in the industry has actually gone up by five per cent since December. Strange days indeed.