Although the retail distribution review (RDR) has ensnared a large proportion of the wealth management community and presents significant challenges to businesses, the regulation brings with it a number of opportunities.
Advent Software's white paper on the RDR has highlighted what it sees as the key challenges and opportunities presented by the RDR alongside the best solutions to these challenges, particularly as the January 2013 deadline draws nearer.
1) Charging models - Advent anticipates that the move to the fee-based model is likely to result in three key consequences:
a) Cost transparency will result from the RDR, causing IFAs and consumers to become more price sensitive, which will mean that wealth managers will need to to demonstrate that they are offering value for money.
b) If commission incentives are abolished, wealth managers will have to work harder with advisers to get their services in front of clients.
c) As the RDR is likely to result in an exodus of advisers from the industry, wealth managers need to think carefully about which advisers they are partnering with and whether their businesses are likely to prosper or survive in the new regime.
2) Training costs - Advent highlights the enormous investment of both time and money in training if firms are seeking to comply with the new professional standards, placing what they describe as a 'significant burden' on wealth managers.
Advent points to JP Morgan Asset Management's review on the RDR, published in the Autumn of last year, which showed that only 9% of advisory staff at wealth managers surveyed were qualified in line with RDR requirements. Meanwhile, one quarter of respondents, all of whom were national firms, said that 75% of their staff would fall short of the minimum standards.
3) Higher staff pay - Raising professional standards and the associated ongoing training has long-term cost implications, Advent notes. By putting the focus on advisers' qualifications and skills, salary expectations are likely to grow, the white paper said.
4) Streamlining cost bases -Firms must invest in systems capable of streamlining what Advent refer to as 'over-inflated cost bases' now more than ever, providing the functionality to improve client service. This should help to differentiate offerings, the white paper added.
5) Overcoming the 'restricted' label - If firms wish to describe themselves as 'independent' they will have to cover the entire universe of retail investments, including packaged pension and life assurance-based products, so firms must weigh up whether the work involved with achieving full independence status justifies the outcome for their business. Alternatively, will 'restricted' become the new norm?
6) Distributor-influenced funds - Wealth firms offering unitised fund structures to pool their clients' portfolios will face challenges. Under the new regulation they will have to show that their performance and costs are competitive and fully meet client needs.
How can wealth managers overcome the challenges?
1) Survival of the fittest - As the wealth management industry has become fragmented over the past 15 years, Advent suggests the RDR will bring consolidation. This would suggest that companies with the capabilities to operate in a post-RDR world will have opportunities to pick up clients and staff from exiting rivals.
2) Benefiting from the outsourcing spike - Advent argues that 'only the most effective wealth managers will benefit from whatever spike in outsourcing demand occurs'. The white paper points to the JP Morgan RDR report, which found that cost was the most important consideration for advisers when selecting a discretionary fund manager. As a result, firms will be under even more pressure to operate efficiently to keep charges competitive. Performance, meanwhile, represented the second most important consideration, while detailed and high quality reporting represents another factor to bear in mind, Advent said.