Challenge and Opportunity - The impact of the RDR on the UK's market for financial advice

After a development period of six years, the implementation of the Retail Distribution Review (RDR) was completed on 31 December 2012. The RDR has brought in a new advisory landscape. The implementation of RDR will usher in several important changes to the financial advice landscape.

Although RDR only came into effect from January 1st 2013, this paper (a collaboration between BNY Mellon and Cass Business School) reflects on the impact of the RDR on the adviser market in the UK based on in depth interviews with senior industry figures, augmented by an online survey of financial advisers. This paper is one of the first to examine the consequences of this regulation on the adviser community.

In order to examine the impact of the RDR on the financial adviser community, we conducted a series of in-depth, face-to-face interviews with senior industry figures. These interviews predated the important FCA announcement in April 2013 of the banning of pre-RDR trail commission from 2016 along with the platform policy statement. The information gleaned in these interviews helped us identify key RDR-related issues and concerns - from the perspective of industry experts - enabling us to design an on-line survey of financial advisers.

The results of the survey presented in this paper are based upon the responses that we had received by March 15th 2013. Throughout the paper we draw on both the in-depth interviews and the survey to identify issues around three key themes. These relate to the impact that RDR has had, or is likely to have on:

• the market for financial advice;
• adviser business models; and
• the valuation of adviser businesses.

From recent Cass Business School research we already know that many individuals will not be willing to pay fees for it in the future. A question which is typically not asked is: would such changes have been occurring anyway through the natural evolution of competitive forces?

In Section 1 of this report we focus on the advisers' views of the impact of these changes on their market. If there is likely to have been a fundamental change in the market for financial advice, it would seem equally likely that the business models of advisers will have changed, or will need to changed in the future to accommodate the change in the market for advice. A business model that may have been fit for purpose in the pre-RDR world, may not be so in an RDR world.

We address questions and issues surrounding adviser' business models in Section 2 of the report. There are a number of reasons why some adviser firms may not be willing to continue in the RDR world; equally there may be other adviser firms that see this as an ideal opportunity to expand their businesses. As such, there may be some advisory businesses looking for a buyer for their business on the one hand and others looking to buy these businesses. In Section 3 of this report we take a look at the possible impact of RDR on the values of adviser businesses.

One of the key findings is that the advisory market is likely to become bifurcated. First, there will be face to face, bespoke advice for each individual client and secondly, there will be restricted advice, selling a limited selection of products both to those who require personal advice and a growing market with a light-touch engagement with the client. Interviewees suggest that larger IFAs may gravitate to the latter model.

Although the majority of advisers in our survey expect to remain independent, 58% of financial advisers expect to see more use of a restricted model in the future. We also find that on average financial advisers expect to be able to service around 150 clients and on average estimate that they will need to earn around £1,472pa from each client to make their business models economically viable in an RDR world. This requires investable assets of around £150,000 per client on average-a number far beyond that available in practice. This suggests that competition for clients with substantial assets will be fierce and there will inevitably be a large number of disappointed advisers who leave the industry. Finally, we also find that RDR is likely to have its greatest impact on smaller IFAs who do not have the necessary infrastructure to support RDR requirements.

Our investigations lead us to the conclusion that RDR may create a greater number of willing sellers ready to sell at discounted rates in distressed sales. It also reveals that the metric most likely to be used is some multiple [around 3 times] of some definition of recurring income, which may refer to fee or trail commission, or both. Of course, even without RDR, the landscape for the advisory sector would have begun to change. Technological advances have made the creation and delivery of investment products more accessible to a wider audience. The growth of platforms since their introduction to the UK in 2001 has been considerable. Furthermore the widespread adverse publicity regarding fund management and advisory fees over a number of years was gradually becoming widely known among investors with the raised awareness of charging practices and the long-run wealth destruction aspects of such charges. The global financial volatility of the last decade or so has also made investors far more sensitive to the likelihood of large drawdowns in wealth.

The industry was already shrinking pre-RDR. Since January 2006, the year the City watchdog unveiled its plans for the RDR, there were 875 sole traders. This number has fallen to 779 as at 31 December 2011. Ernst & Young's Industry Study in 2010 predicted the number of registered individuals would fall from 30,000 to 20,000 within the five years to 2015. The number of directly authorised firms providing financial advice has fallen from a high of 5,584 in September 2008 to 5,482 at the end of 2011. The number of appointed representatives has dropped from a high of 9,372 in September 2008 to 8,590 at the end of 2011. In 2006, Deloitte warned that "increased competition from areas such as bancassurance and multi-tie advisers" would put pressure on IFAs to quit. It did not happen. In the 2010 FSA policy paper they forecasted that around one quarter of advisers would leave the industry by 2012, mostly as a direct result of RDR; however they suggested that these would mostly be very small businesses and that the market would largely remain intact. This indeed seems to be the case, perhaps with the decisive, major influence being the formalisation of qualification standards. Another important influence is retirement: one IFA Census Survey by NMG Consulting in 2009 suggested that 25% of advisers would leave the advice market pre-RDR, with 6% going elsewhere in the industry, 4% leaving the industry, and 15% retiring (of which 7% would have retired anyway). RDR has certainly given the more mature advisers a reason to depart the industry.

The fourth draft version of the final report can be downloaded below.