The Retail Distribution Review has set the clock ticking for those giving regulated advice and sales guidance on retail products, says Matt Smith
The message is loud and clear – get qualified by the end of 2012 or risk being out of business. At its heart, the RDR is seeking to rebuild consumer’s trust and confidence in the retail financial advice market by raising standards of professionalism through qualification. But it is naïve to think this kind of change can happen quickly. The transition will not be painless as advisers weigh up what is being asked of them to continue what many have been successfully undertaking for years.
Research from the Chartered Institute of Insurance (CII) highlights consumers’ appetite for more robust and independently verified professional standards in the financial services industry.
The consumers interviewed believed public trust and confidence could be improved through professional standards. With 88% responding this could be done through a demonstrated commitment to professional ethics, and 78% believing advisers’ continuous learning and development could achieve this.
This sentiment has not been lost on the industry and the CII also highlights the fact that advisers are addressing the issue. In their latest membership survey, the fifth of a series on RDR carried out by Ernst & Young, on behalf of the professional body, 66% of Certificate-level advisers said they were en route to the Diploma qualification, 41% of Diploma-qualified respondents were considering, or will definitely do, the Advanced Diploma; and 46% of Diploma qualified respondents aspire to Chartered status.
There is little doubt that taking exams and gaining qualifications are an essential part of the drive to make the industry a profession that can place its advisers on equal terms alongside the likes of lawyers and accountants. But for some, understandably, the RDR is still provoking much soul searching.
In part, this is because it will probably be after an election, once we know who is going to be in government, that we will get clarity on exactly how the Retail Distribution Review will really unfold. If the Conservatives win and stay true to their promise to abolish the FSA, would they abolish the RDR with it? It is possible to be sympathetic to this consideration but it is not a view upon which to form a business plan. After all, the intentions at the heart of the RDR are good ones. So there is much to consider.
Strategic consequences
There are strategic consequences in terms of the business model, and key relationships with customers – not least the decision to operate in the independent or restricted advice space. It will change the way advisers and their businesses look at themselves. Putting aside any new capital adequacy requirements, advisers will no longer be offering independence of product selection but independence of advice, and that advice will come from a highly qualified professional working to a professional standard.
In addition, the cessation, in most cases, of commission payments redefines the business model. It is eminently sensible to prevent the possibility of anyone selling a product simply to obtain commission but the consumer is in for a shock as fees will ultimately impact on clients as, without commission, advisers will not only charge for the advice but have to increase what they charge for their services.
But strategically we must not ignore the hugely positive impact of breaking the link between product and remuneration. By tying revenue instead to the provision of service, product providers are no longer the only mechanism for generating revenue, enabling IFAs to regain control over all elements of the value chain and build embedded value within their business.
RDR means advisers are free to build a service proposition that fits the needs of their clients and charge a fee that represents value for them and their clients. It is about becoming a genuinely professional service orientated business. Product commission systems encourage transaction turnover, charged advice may not be initially popular but it will demonstrate real value over time.
While no-one disputes the value of continuous development, it is easy to see why some might think the new qualification requirement is heavy handed. Many advisers are already highly qualified, experienced and trusted professionals. In these economically challenging times, time and cost issues around achieving qualifications may affect advisers’ services to investors and the volume of advising thereby affecting income.
Practical Issues
Then there are other more practical issues such as how does an adviser achieve the required level of qualification. Obviously this raises issues of the suitability of exams and syllabuses, as well as costs and convenience. To help this journey, the FSA is expecting professional bodies to play a very positive role in achieving its goal of raising standards. Professional bodies would be taken as a ‘safe harbour’ evidencing compliance on both an initial and ongoing basis of the required standards. They are also providing the new qualifications.
The deadline for the new minimum competence standard for existing advisers is the end of 2012. This does not leave much time (especially if advisers require re-sits!). There is a list of legacy qualifications that allow advisers to work out what gaps they need to fill in order to get qualified and any advisers who have been deemed competent after 30 June 2009 can achieve the Level 4 requirements at a later date to be determined.
The Chartered Insurance Institute offered by CII, is a modular course that allows advisers to pick from many areas including financial planning practice. They advise that candidates should allow 400 study hours and from £850 for four modules and supporting texts. The qualification has the additional benefit of being from a Chartered organisation.
The ifs Diploma for Financial Advisers is available online from £595 and requires 310 study hours. Further help is available for advisers from organizations such as the Personal Finance Society (PFS) which has a range of events and support services to assist IFAs. Members have access to online learning statements, and are also supported with local study groups, workshops and refresher courses.
Raising Standards and Creating Barriers
The RDR presents some large challenges for advising businesses and individuals alike. It will raise standards and create barriers to entry in the advising market. Consumers will recognise that advice does have value and goes beyond product selection but the number of advisers will inevitably, for a period at least, fall.
One concern in an otherwise optimistic view of the RDR is that in a debt ridden society, not enough consumers really have enough investment money that warrants significant paid advice and that the RDR is dividing those that have (high net worth clients) from those that do not.
Most consumers who are not high-net-worth will only approach an adviser for a single purpose whether it be a mortgage, a pension or an annuity. They do not want or request a full financial audit and, while some may need or come round to the idea, are we condemning everyone else to become the financial prisoners of the banks?
Of course there have always been lines of demarcation and we must hope the RDR is not redrawing them in favour of banks at the cost of the consumer. For this reason financial advisers need to fight back. The image of banking has never been worse but memories are short. Advisers have to make this change and gain consumers trust before the banks get their houses back in order.
Advisers will continue to thrive. 2010 will be the year where we see advisers start to position their business to take advantage of the opportunities presented by the RDR. It will redefine the landscape of financial services in this country and present great challenges for advisers, consumers and product providers proving once again that one man’s meat is another man’s poison.
Matt Smith is managing director of WPB Creative
