After many years of what seemed like endless consultation, workshops, forums and constant revision of implementation dates, we stand on the brink of full implementation of Retail Distribution Review ("RDR") in 2018. Here’s a quick recap of the thought process behind the introduction of RDR and the potential positive impacts.
The rationale driving RDR implementation
With full implementation in 2018, the singular intention of RDR is to ensure that financial products are distributed in a way that supports the delivery of Treating Customers Fairly ("TCF") outcomes. Essentially, the aim is to:
- Support delivery of suitable products and advice.
- Allow customers to make informed decisions.
- Enhance professionalism in the financial services industry.
- Promote fair competition.
- Promote sustainable business models, including those of financial advisory services.
Why financial advisers should not fear RDR
While RDR should be perceived as a positive change for the industry, many advisers are wary of the impact it may have on their businesses and the way they operate. However, if the international roll-out of RDR in the UK is anything to go by, anxiety surrounding implementation is unnecessary, as cited by Mark Duckworth, chief executive officer of UK-based Openwork. He has hailed RDR as a hugely positive development, saying it raised professional standards and increased advisers’ average income. “The average income of the UK financial planner went up from a pre-tax figure of £98 000 to £178 000,” said Duckworth.
RDR was implemented in the UK in 2012 and has since resulted in a number of investor and adviser benefits. In addition to increased transparency and clarity in financial advice, the demand for quality advice is at an all-time high. Increased regulation has led to a number of advisers exiting the industry, leaving behind qualified experts who charge a premium for quality products and services.
Another concern among South African advisers is that increased costs will result in decreased profits. Guy Bolam, director of UK-based financial consultancy, BolamRose also had his concerns. “We knew commissions were going and costs would increase, so we expected profits to be down or to break even initially,” he says. However, this never happened. The attrition of advisers in the market and the low number of quality advisers remaining coupled with the fact that perceived professionalism increased led to clients being more willing to pay for advice and a professional service.
An enhanced and comprehensive financial planning landscape
Gary Plein, co-founder and principal of Aspire Independent Planners has also added to the business case for RDR, saying that its implementation has resulted in an enhanced and comprehensive financial planning landscape. “Planners are now more inclined to look at the holistic picture when dealing with a client, rather than dealing with a once-off product purchase,” he says. International trainer for financial planners, Bill Bachrach, says the adviser’s job is to get people to do something they are not hardwired to do. "It's not enough to merely give advice, you have to build trust and lead clients to implement your advice, even if is not what they want to do,” he said.
Initially implementation was planned for 2017 and although some aspects have been implemented, the FSB scheduled market consultation into the aspects of adviser categorisation as well as the definition of investment management in a licensed industry. This reveals that RDR is not a singular, isolated event that will happen on one specific date. Rather, it is an iterative process that requires dialogue and interaction between all stakeholders. Instead of perceiving RDR as something to be feared, advisers should view it as a stepping-stone to evolving the industry into one of greater openness and professionalism.
- RDR is divided into three phases.
- - Phase I, of which some aspects have already been introduced.
- - Phase II, which will occur post the Financial Sector Regulation Bill; and
- - Phase III is scheduled for implementation as part of the Conduct of Financial Institutions Act.
- Stricter regulation of financial advice and financial product distribution provides advisers with the opportunity to enhance client relationships and fine-tune business models.
- A more customer-focused environment and industry ultimately benefits clients as well as advisers through transparency and increased professionalism.
- Instead of fearing change, advisers are encouraged to educate and equip themselves in order to gain the greatest benefits from the transition into a new adviser landscape.
This article is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser. Discovery Life Investment Services Pty (Ltd), branded as Discovery Invest, is an authorised financial services provider. Registration number 2007/005969/07.