14 Jan 2015
RDR two years on- How has it affected advisers?
As we have mentioned in our previous article , the initial aims of the Retail Distribution Review (RDR), was to make the retail investment market work better for consumers by raising the minimum level of adviser qualification, removing commission payments and providing transparency of charges and services.
The changes were a once in a lifetime overhaul, and we will continue to see the effects of the RDR on consumers and advisers well into the future.
So what do we know so far?
Our first article looked into the effects, two years on, that the RDR has had on consumers. We discovered an “advice gap”, with the market split into two types of consumer- those who can and will pay for financial advice, and those who can’t, or won’t.
There have been both improvements and negative effects for consumers looking for financial advice thanks to the RDR, but how has it affected the people giving the advice? Has RDR been a positive or negative change for financial advisers?
The RDR on banks and financial advisers
After the introduction of RDR Lloyds Banking Group, HSBC, Royal Bank of Scotland and Nationwide all set out to change the ways they give out financial advice, with many high street banks requiring customers to have upwards of £75,000 ready to invest to qualify for advice. This meant that many branches completely cut their financial advice aspect, as “they could not give cost effective financial advice to those levels”. This reaction had a massive effect on financial advisers working in banks or building societies.
Pre the RDR, the number of advisers working for banks or building societies was 8,658. As of 2014, that number fell to 4,809. The introduction of the RDR has almost halved the number of advisers working in bank and building societies. As well as this, the everyday consumer now has limited access to advice from banks or building societies they trust or have a loyalty to.
The decline in the number of financial advisers is not just a problem for those working in banks. A report by Cass Consulting advises that the number of registered financial advisers would fall from 30,000 to 20,000 by 2015. As of 2014, the number of advisers stands at 20,453, so the report was not far off.
The reasons for the reduction in numbers are varied:
- Many advisers found it difficult to make a smooth transaction from a commission based model to one based on fees, which may have caused them to leave the industry.
- The inability of some advisers to meet the new minimum qualifications may have pushed some advisers to leave the industry- but some people may argue that this is a good thing.
- RDR tends to favour larger, more processed focussed firms of financial advisers, so firms of smaller advisers have shrunk.
One of the more significant changes brought about by the RDR is the fact that on average advisers now require £1,500 investment from each client to sustain the amount of money they need to function as a business. This means advisers priorities may have switched from doing the best for their clients to simply making enough money to survive, and in turn, RDR favours stronger, more processed- focused firms of financial advisers.
The increasing regulatory and compliance costs, coupled with the fact that some businesses have had difficulty in adapting business models, shows that smaller more independent financial adviser firms are the ones who are really suffering. Firms who have traditionally dealt with lower income clients on a commission basis, and firms who do not have spare capital to invest in infrastructure to support the RDR, have felt the effects of the RDR the most. As the figures mentioned earlier they show many firms have had to close, or may be just about breaking even thanks to the effects of RDR.
So what’s next?
There is no question that the RDR changed the face of financial advice and the way financial advisers work. It has had some positives for advisers. They are now better qualified, and there are signs that the industry is becoming increasingly more professional. This said, there have also been job losses. Advisers working for high street banks have been hardest hit, which has resulted in the decrease in financial adviser numbers. There are also additional arguments that advisers are now more inclined to work with those with money to invest and not with those looking for the best deal, as the margin for making money has gone up.
The RDR was brought in to make the market place more transparent and fairer for consumers, not for advisers. This said it is important not to overlook the fact that if struggling to survive, firms will look at more ways to make as money, and their priority might not focus on the consumer. The RDR may have overlooked the fact that if advisers are not making money it could have an adverse effect on consumers- creating the so called advice gap mentioned discussed further in my previous article.
What have your experiences been? Let us know if the RDR has effected how you work, how you relate to clients, and if you think it was a good idea.