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Why RDR demands your service is not a turn-off for clients
by Brett Davidson on Jan 17, 2013 at 14:03
With clients now able to turn off ongoing revenue, IFAs must ensure their proposition is outcome-focused and provides value for money to ensure their long-term survival, writes Brett Davidson of FP Advance.
The retail distribution review (RDR) has caused an explosion of activity and thinking, much of it well overdue. The issue of qualifications received the most attention, which was not surprising given the threat to advisers unable to meet the demands. But the most interesting issue has been the change to business models, and that is not over yet.
It seems to have only just dawned on some advisers and firms that the biggest threat to their business is coming this year, and it is not fee charging. Most advisers accept that clients will pay fees if they offer something of value. The big question for 2013 and beyond is: will clients keep paying?
Ongoing revenue at risk
The RDR enables clients to turn off advisers’ ongoing revenue. For many IFAs this will become a growing problem as more new business falls under the new regime. Even legacy business will eventually be subject to the new rules, putting existing revenue under threat.
It is possible that the adviser-client relationship will withstand this threat, as it has many other threats in the past. The annual review meeting is perceived as pretty high value, but its content can leave some clients feeling as though they have had a cup of tea and a chat. Will they be willing to pay £1,000, £2,000 or £10,000 per year for this?
When clients see their charge of 0.5%-1% of assets under advice converted into pounds, this might be the question they ask themselves. If they conclude they are not receiving value for money, they may withdraw their custom, thereby cancelling the adviser’s ongoing revenue.
This will not start with a call to the adviser; the client will go straight to the provider that administers the revenue, making it difficult and time consuming for the adviser to rescue the relationship and the fee (if it can be rescued).
Polarised business camps
If this scenario plays out, the once predicted 20%-30% decline in adviser numbers may take place, albeit slowly, over a three-to-five-year period. The businesses remaining may start to polarise into high-value and low-value advisory businesses.
High-value firms are not concerned about these issues because they have a robust offering for their clients that will continue to justify a premium price. Their fees are not for managing money for clients but for providing a complete lifestyle financial planning service that delivers an outcome.
Low-value businesses will be those that survive but without a comprehensive and robust offering. When the time comes to sell such a business, it will be difficult to command a premium price for the client bank.
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