The Retail Distribution Review programme of reforms to the UK financial advisory industry has been in force since the start of the year. But its implementation is not the end of the story.

The Retail
Distribution Review programme of reforms to the UK financial advisory industry has
been in force since the start of the year.  But its implementation is not the end of the
story. Instead it could be the catalyst for further and more fundamental
changes in the financial advisory landscape argues Mark Wilkinson, sales manager at Dion Global Solutions.

Now that the RDR has had a few months to
bed in, the independent financial advisor community has more or less come to
terms with the profound changes it has introduced to the financial advisory
market. How investors will respond to the fundamental change in their
relationship with advisors will become apparent over the next twelve months -
although most sensible firms have spent the preparation period communicating
and explaining the changes to their clients.

What is less widely discussed is the impact
that the RDR will have in the wider financial services market – most
particularly for the wealth management community. This seems likely to be
fertile ground for future debate, particularly as the implementation of the RDR
has pushed IFAs closer to the wealth management business model.

In effect, the architects of the RDR looked
at the advantages offered to investors by the wealth management business model,
and demanded that they be made available to investors at the retail end of the
market. Hence the new direct fee structures and the qualification requirements.

Of course, the fees and the minimum
investment thresholds that typify wealth management are not appropriate to the
IFA market or their clients. And so the new regulation has created significant
tension between the need to improve service and transparency with the need to
keep costs low.

Consequently, justifying the direct charges
that have replaced commission-based fees from product providers has become a
primary concern for IFAs – particularly when it comes to renewals or repeat
advice. Equally, the ability to offer discretionary investment services and
manage complex portfolios, if qualified to do so, is not necessarily compatible
with the IFAs’ typical volume-based, relationship-driven business model.

In effect, the Retail Distribution Review
requires IFAs to offer the benefits of a "wealth-management lite" service,
without wealth management fees. Not surprisingly, managing this new business
model is likely to be the primary challenge for IFAs in the new legislative environment.

However, a growing number of innovative
IFAs and smart wealth managers recognise that this challenge is also an
important business opportunity. We are seeing creative partnerships develop in
which IFAs outsource the provision of discretionary services to carefully
selected wealth managers. In practice, this allows IFAs to offer tailored portfolios to match individual client mandates and
risk profiles in place of more generic funds that broadly fit their criteria.
In return, wealth managers offer value-added services, including high-quality
reporting to both the IFA and the end-client as a low-cost means of extending
their reach and increasing their assets under management.

For the IFA, the benefit is clear. They can
develop an enhanced and differentiated service that includes access to actively
managed portfolios and, crucially, the ability to rebalance those portfolios in
response to rapid changes in market conditions. Given the recent shocks to the
macroeconomic climate in both Europe and the US, this is a particularly
attractive proposition that can justify the fees that IFAs must now directly charge to their clients.

What’s more, by choosing to work with
wealth management firms who have a demonstrable track record in beating
benchmarks, IFAs can offer this more granular and personal service without
having to acquire the time and resource-intensive qualifications mandated by the
Retail Distribution Review.

This type of partnership also helps address
a longer-term structural problem. The internet has enabled a growing number of
small-time investors to follow the DIY route and disintermediate IFAs from the
research and investment process. The availability of wealth management services
without the typical wealth management price tag acts as a useful counter-attack
to this trend.

For the wealth manager, entering into a partnership
with an IFA opens up new channels for distributing their investment IP and
extends it into new areas. A straightforward outsourcing deal as described
above is still relatively inefficient because it requires portfolios to be
managed on an individual basis. Creating funds that are directly marketed to
IFAs can remove some of these inefficiencies, since what is being sold is units
of the fund, requiring only one investment decision. A number of firms are
already discovering that it is a relatively short step from offering services
to an individual IFA’s aggregated client list to developing products to offer
out to the independent financial advisor market as a whole.

However, for both partners to realise these
mutual benefits, a large degree of process automation is required. The wealth
manager’s underlying technology in particular will need to be configured to
deliver the efficiencies required at every stage.

Wealth managers will struggle to offer
their services to this new client base without a core system that is configured
to provide portfolio management, straight-through processing of trade
executions and settlement, and full custody functionality. The wealth manager
will also need a complex and sophisticated integration model that supports the
seamless connection between platforms, IFA back-office technology, and online
services. Implementation of such a system will deliver scale and efficiency to
all players in the value chain.

Wealth managers will also need specific functionality
to handle RDR-compliant charging. Now that responsibility for remunerating IFAs
has passed from product provider to investor, systems that can only apply
charges to the underlying investors are not enough. Instead, it needs to be
able to take the wealth manager’s own cut as well as that of the independent
financial advisor – and provide all the accompanying reporting and accounting
functions. In addition, the system has to be able to scale commissions around a
third party’s charges as well as the wealth manager’s own fees.

The success of the
IFA-wealth management partnership model will also depend on the wealth
manager’s ability to offer white-labelled reporting that includes online
valuations. As we have established, more sophisticated analysis and regular
reporting of activity is a critical differentiator between bespoke fund
management that investors are prepared to pay for and the free, but generic,
investment advice they have received so far. Detailed portfolio analysis across
multiple individual holdings allows the provider to deliver a far higher
quality of reporting than standard, institutionalised, fund-based solutions.

RDR could have a genuinely transformative
effect on the relationship between IFAs and wealth managers, and on the
services made available to investors. For the same reasons, pension provision,
self invested personal pensions, group pension schemes and all the other areas
of financial planning which have been in the hands of institutional providers
could be equally transformed. All of this could shift IFA services into a much
higher gear and enable them to be delivered with the touch and feel of a
bespoke portfolio management service.

The implementation of RDR is not the end of
the story. In fact, the RDR could be the beginning of a truly transformational
journey, which delivers fundamental changes across the entire range of IFA
services – with wealth managers best placed to be the earliest beneficiaries.

However, as the burden of due diligence
will continue to be shouldered by IFAs, they will not enter into such
partnerships lightly. They will need to assure themselves of the capabilities
of their chosen partner; in turn, wealth managers will need to demonstrate that they
have the sophisticated technology needed to manage multiple portfolios
alongside their fund management expertise. Those that can prove they have what
it takes to generate attractive returns at low cost will be in the best
position to reap the rewards of the post-RDR world.