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The effects of the RDR on the needs of smaller clients

It is not entirely clear as to the effect that RDR will have on smaller clients’ investment needs

By Helen Angove | Published Oct 29, 2012 | comments

The RDR brings with it many challenges that IFAs will have to overcome through 2012 and beyond. One area where the solution is not entirely clear is the effect that RDR will have on smaller clients’ investment needs.

A smaller client is defined as one with investable assets of less than £100k. Historically, these clients’ investment needs have been difficult for IFAs to address and review cost effectively on a regular basis.

The selection of appropriate funds requires not only the time to conduct the due diligence on the potential investments but also the time to write letters recommending the switch and follow these up, as clients don’t all respond in the first instance. It seems highly likely that the workload attached to these smaller clients may simply make them unprofitable as well as giving IFAs some cause for concern regarding treating customers fairly (TCF) issues.

So what are the options?

The first and most unpalatable would be to simply disengage from smaller clients. However, IFAs would undoubtedly feel a moral obligation to these clients.

Additionally, many smaller clients’ investable assets increase significantly over time - the old adage ‘from little acorns, big oaks grow’ springs to mind. And finally a reduction in revenue at a time of ever increasing costs is not something many of us would like to entertain.

There are, however, some decisions to be made. For example, advisers could use risk-rated model portfolios to appropriately invest client assets within a wrap or platform. The concept is a simple one - the IFA maintains the relationship with the client by ascertaining their risk profile and selecting the appropriate risk rated model portfolio, the discretionary fund manager (DFM) provides the choice of risk rated model portfolios and the platform provides the custody and administration.

Model portfolios are designed in conjunction with the IFA to ensure they reflect their risk profiling process but IFAs retain responsibility for the ongoing servicing of their client.

This is an important point to note, as they are responsible for monitoring their clients capital gain tax position within the models going forward. As markets improve, this may become a bigger issue for IFAs and their clients.

The models are also limited to the fund choice available on the platform, with many of the more specialist investments such as alternatives not available due to their structure.

It is important that the industry addresses smaller client needs while at the same time ensuring that they remain profitable to IFA’s.

Helen Angove is sales director at City Asset Management

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