Retail Distribution Review - RDR Strategy

2011

Retail Distribution Review
Don’t Fail to Plan
The financial advisers who welcome the RDR believe that the emergence
of higher-qualified practitioners will have an enormous bearing on
improving consumer outcomes far outweighing any short term losses or
inconvenience of the ban on commission.

Lee Werrell
CEI Compliance Limited Tel 0800 689 9 689

Retail Distribution Review: Don’t Fail to
Plan
Without doubt, the Retail Distribution Review (RDR) is one of the most important regulatory
developments for many years. Far reaching and constructively changing the financial
services world or short-sighted and destroying the work of decades, the views would appear
polarised. Whatever it is, the RDR is prompting both financial advisers and providers to
rethink the financial landscape from the points of view of the end consumer, who, in the
end, are the ones that matter.

Unfortunately the RDR has happened in a period where the Financial Services Authority
(FSA) is due to be split up and undergo radical change itself, which adds to the turmoil of the
change, like two tornados meeting. The ultimate outcome is the FSA’s desire to close the
savings gap by giving consumers greater confidence and trust in the products they hold, and
the advice they take.

The new framework comes into place at
the end of 2012, and provides a fantastic
and rare opportunity to build long-term
relationships focused on investment and
tax solutions rather than products.
Technology and all the wizardry that it
professes will be harnessed to the
benefit of clients, advisers and providers
alike. A new, leaner, more effective and
productive financial services firm will
thrive; those who do not plan, fail to
engage help in their setting of strategy
and implementing adequate processes and procedures, will ultimately fail.

The RDR proposals have the greatest potential to provide for a thriving advice sector,
serving clients, customers, investors and savers alike, valuable, essential and professional
advice.

The financial advisers who welcome the RDR believe that the emergence of higher-qualified
practitioners will have an enormous bearing on improving consumer outcomes far
outweighing any short term losses or inconvenience of the ban on commission.

Skandia has published research in the form of their Adviser Confidence Barometer that
suggests 73% of advisers feel the quality of advice will improve mostly because of the RDR's
enforced higher minimum qualifications. Only 19% felt the ban on commission would have
the most positive impact, found.

However, advisers who felt the RDR would improve consumer outcomes were outnumbered
by those who did not.
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Retail Distribution Review: Don’t Fail To Plan v1.0 June 2011

A total 57% of the 1,700 adviser respondents said they either felt the RDR would have a
negative impact on the customer experience, or that it would have no bearing at all.

But Skandia said the number of advisers positive about the RDR represented good news for
the industry.

Adviser charging
Miraculously and quite painlessly the industry is already well on the way to the new model
of adviser charging that the RDR will make mandatory. The welcome inclusion of restricted
advice within the rules and the separation of product and advice charges by vertically
integrated firms will bring much needed consistency to the market. The marketplace has
been too confused recently with tied, multi-tied, panelled IFAs and whole of market IFAs.

Independent and restricted advice
The distinction n the new rules between ‘independent’ and ‘restricted’ advice provides
plenty of opportunity for financial advisers to clearly plan, develop and differentiate their
service offerings. There will always be value associated with the independent label, but the
‘restricted’ label gives scope to offer different types of services to meet different client
requirements.

A vital element of the initial
recommendation and ongoing service
requirements is the ensuring that each
customer understands the service they are
agreeing to; which makes the different
forms of advice work. The adviser who truly
embraces the new regime of advice and
takes segmentation one step further, can
really turn it to their advantage by creating
a streamlined, technologically efficient and
profitable business, providing services that
all types and category of client both need
and want.

Unqualified Advisers
Non-advisory roles offered to IFAs who fail to meet RDR requirements are rightly being
warned by the FSA to make sure they do not accidentally or purposely start to deliverer
advice.
Some firms are considering offering paid introducer roles to unqualified advisers or retirees
after 2012 as they pass their clients on to a new, qualified practitioner. These outgoing
advisers or lay advocates may sit in on meetings and be a point of contact for their old
clients, but they will not be permitted to give financial advice or professional opinion. This
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being a potential major and devastating loose end, encouraged firms to seek guidance from
the FSA about how the regulator would view this arrangement and admitted to concerns
about unauthorised individuals “accidentally” advising clients.

The FSA hinted it would be firms’ responsibility to ensure lay advocates do not make
recommendations to their old clients. The FSA view was that an ex-IFA employed in such a
capacity will have to be extremely careful not to advise. Clear and documented sales
processes for advisers and non-advice roles need to be completed and filed as part of the
company’s processes under SYSC and the T&C scheme.

The FSA said it was not necessary to issue any further guidance on lay advocate adding: “The
situation is very clear: Any adviser giving advice after 1 January 2013 must be fully
qualified.”

Firms have said that they will pay “lay advocates” in a number of ways. This could be as a
percentage of client fees, as a salary or as a fixed retainer.

The Trail Commission Confusion explained
There was confusion over trail
commission and what happens
under the RDR rules.

The FSA have clearly stated that receipt
of pre-RDR trail commissions is a right
of advisers for previous advice and
service commitment. If a firm is bought
by another, the new rules will not
prevent entitlement to trail
commission being transferred to the
new firm.

This has to be welcome news to the advisers if, as it appears, the change in sentiment will
now allow a smooth transition for firms that wish to change their business model from
directly authorised to networks or nationals or, even to sell their business.

Preventing the transfer of trail commissions would have caused significant stress for many
firms now concerned the options going forward. Particularly concerned were those who
were looking for a possible exit after a lengthy industry career. Although trail commission
will end in respect of new business post 2012, the regulator in their wisdom has at least
allayed some fears with a sensible and moderate approach.

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It has been muted that the reasons the rule was introduced was to stop advisers going
round sucking up clients and trail income but not providing any ongoing service to clients,
with the only objective of receiving recurring income streams from the providers.

Now that we have confirmation the regulator expects trail commission to eventually die off
over time, it is also much easier to understand the right way forward: where an adviser is
receiving trail then they can continue to receive that historic trail post 2013, but then going
forward, ongoing charges will only be levied where a client is paying for an ongoing service.
For advisers, this is a powerful argument as to why adoption of clearly written client
agreements which can align the adviser and client perfectly. The client effectively enters
into an ongoing service agreement with the adviser which sets out specific services the
client will receive; how much this will cost and also that the client can cancel the service and
cease payment if they felt that they were not receiving the service agreed upon.

Over time trail commission as we know it will indeed cease to exist and an adviser’s business
would be made up. This in itself instills the need for advisers to build up long-lasting,
professional and trusted business relationships with their clients and seek to provide
financial advice and guidance over the years focusing on clients’ goals and objectives.

Platform technology
In a post-RDR world it should be an ideal
environment in which to be an adviser, but in
alongside the new adviser offering providers
will have to step up to the mark in order to
offer appropriate and quality support.

The platform providers not only need to offer
the correct and appropriate support, but they
also need to work on getting the technology
right. The platform model can, if accurately
planned and appropriately managed, deliver
the diversification and flexibility all the
advisers need to meet the needs of a segmented post-RDR client base. To be effective it
needs to provide the solid foundation that clients’ financial plans require and allow for these
plans to be easily implemented and managed.

Choosing a platform will become more technical and demanding in the post-RDR world and
correct due diligence will need to be conducted to satisfy compliance requirements. The
following list provides an indication of what any adviser needs to consider when performing
a robust due diligence review. These include:

 Platform reputation and financial standing
 Terms and Conditions of using the platform
 Cost, charging structure and transparency of charges

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 Range of funds and tax wrappers
 Range of asset classes
 Functionality
 Accessibility
 Additional tools such as risk profiling and asset allocation
 Training and support services.

Post RDR – The Survival of the fittest

The RDR is rapidly approaching and it is not just a question of getting qualified. If you think
of your own RDR transition, what will you do in those 18 months left? Will you embrace
change or have you yet to start your journey?

You will need to consider what your businesses model will look like in this challenging
landscape and to identify the needs of your clients. Once you achieve this, we must try and
meet these needs in a manner that delivers business profitability and a mutual and ongoing
benefit for both the adviser and the client.

Many experts have waxed lyrical on their views of what an RDR-ready business looks like.
Some are accurate and some irrelevant to individual firms businesses, however, the time for
thinking about it is nearing an end. Winston Churchill used a stamp for staff papers stating
“Action This Day”; a standard to be heeded now. Action is now vital if you want to ensure
you can implement a profitable and fulfilling business model under the RDR.

The problem for many advisers is that although they desire change, many do not have the
tools or support available to enable this. Theory is all well and good but it is no substitute
for rolling up your sleeves and working out your future business model and now practical
help is at hand.

There appears to be several main ways to maximise your transition to the brave new world
and these are considered to be;

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1. Vision - decide what you want your business to look like

Business structure: you need to develop your business model or framework. Initially you
need a clear description of

 what you do now
 who you do it with
 who helps you and
 what you get in return for the effort you put in and the services you provide.

Write this down, avoid the jargon and then give it the future-vision test:

 Does it seem real?
 Does it motivate you?
 Will it excite and attract new clients?
 Will it keep existing clients interest?
 Do you have any unique selling points?
 Is it achievable at an ongoing profit?

If it fails any of these criteria, start again.

2. Segment your client bank to identify profit and long term value

Moving into business planning mode requires you to define your customer segmentation by
dividing your client base into groups of individuals that are similar in terms of age, gender,
interests, spending habits and so on. Companies using segmentation find it allows them to
target groups and allocate business resources more effectively.

Simply put, customer segmentation as the best way of identifying the clients who can
provide you with most profit in future. It can also help you identify the clients that are
costing you time and money, as well as spotting those that you can develop into better
clients.

You will then ensure you design a proposition that offers sustainable long-term value for
both your business and your clients.

3. Design your client proposition

Your client proposition is what it says on the tin. This is the charter or what you say you will
do for your current and potential clients. As you transition your business, it is a good idea to
ask yourself questions such as:

 Do you have a client experience?
 Will clients pay a fee or a retainer for this?
 Is it of real value to you and the client now and in the future?

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On reflection, if you realistically think that the answer to any of these questions is likely to
be no, you need to rethink. You need to develop a profitable proposition that delivers real
long-term value to your clients.

With the right client proposition, you can create and build relationships with loyal clients as
well as make yourself RDR-fit at the same time.

4. What are your remuneration options after 2012?

Not only have you decided upon a correct, fair and workable client proposition for each of
your customer segments but you also need to then select the most appropriate
remuneration methods for the service you will provide tot them. Whichever method you
choose, always make sure it is profitable.

Areas to consider may be;

 adviser charging;
 consultancy charging;
 trail commission;
 retainers;
 fees; and
 protection issues.

5. Processes

Processes and procedures are more important in the regulatory side of providing advice.
Just as important as deciding on your remuneration options are the processes you must put
in place.

6. Make an action plan

Your action plan should be on-going and develop organically as you progress. It should not
be a one-off event. Ideally the action plans you start should become part of your business
DNA and a natural part of your day-to-day activity.

Remember the old adage; Failing to plan means planning to fail

About CEI Compliance Consultancy
Our Consultancy, with its expert team of business management consultants will act as your out-of-
house ‘in-house’ management team, whether on a project by project or on a long-term basis.
We will help you manage your business to optimise your opportunities.

Having been involved in Strategic Planning and Risk Assessment with the Boards of Directors of
well-known companies, we have also been involved in developing the Operational and Tactical
plans that implement the “vision”. We can provide on-the-spot support and guidance for the

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length of the project, from when it is a twinkle in the eye, through to the launch and up to its
successful embedding.

With our select team of experienced strategic planning consultants, our consultants will help you
generate the business strategy and will guide you through putting in place the necessary
effective and precise strategic process that is targeted to ensure your product or service has the
right backing, the right positioning and the right promotion to provide sustainable success.

Whatever the size of your business, from start-up to international company, specific objective strategic
planning support can provide the crucial difference which will mean that resources are
concentrated constructively, energies are focused creatively and the outcome is fully profitable over
the long term.

Companies we have been involved with in the last 10 years;

CEI Compliance can help provide a full compliance support service, reducing
required management time, ensuring all areas are up to date and working for your
firm’s long term benefit.

Call 07092 289901 today or go online at
www.ceicompliance.co.uk
For help call:

Lee Werrell – FInstSMM Chartered MCSI Cert PFS

Managing Director

CEI Compliance Limited

lw@cei-compliance-limited.co.uk

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Web: www.cei-compliance-limted.co.uk

www.skilledpersonsreports.co.uk

www.complianceconsultant.org

www.ceicompliance.co.uk

www.s166.co.uk

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Retail Distribution Review - RDR Strategy

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Retail Distribution Review - RDR Strategy