The financial advice industry saw a huge amount of change during 2012. The retail distribution review has proved expensive and time consuming for most advisers, and many found themselves embroiled in huge amounts of administration and additional training.
As a consequence they either had to work harder with longer hours, or they have seen their revenue levels fall. Many would argue that they have not been able to get on with ‘business as usual’ as industry-related pressures have created a lot of distraction and frustration.
This year will be no different. The industry will continue to evolve and we will see more significant change. There are still many unknowns.
It is clear that firms should have already considered and launched their client proposition, to confirm how they will be remunerated, and – as importantly – how they will communicate this to clients at the beginning of the advice process. If they have not, they are opening themselves up to significant and unnecessary risk and anyone who thinks they will simply be able to carry on as they have before may be in for quite a shock as clients begin to understand the relevance of RDR to them.
Ironically the economic climate means that clients need advice more than ever before and there are business opportunities everywhere. The clients especially affected are those who may be unable to pay for investment advice in future. Where will they go to for guidance or will they simply not bother? I am sure in time this group of individuals will become more vocal about their reduced access to advice in a manner they can afford.
Yet, despite all of this, for those firms that do make it through, really significant opportunities exist.
I am astounded by the number of firms that do not appear to be RDR-ready, and the large number of inconsistent models that still exist. We are in the middle of January, yet some firms appear not to have fully embraced the required changes. Many operate on wafer-thin margins which are too narrow to deliver the enhanced service that clients will need and expect.
I firmly believe this will be the year where the best will stand out from the rest and this will become most apparent in the last two quarters of 2013. I suggest keeping an eye out in the summer months to see which firms begin to falter and which firms build on the opportunities that exist.
During 2013 it is inevitable that we will see more businesses failing within our sector. Successful firms will be those that offer clients a proposition focused on value and an outstanding client experience. Firms with a strong client proposition, a firm level charging structure, that know how to sell the benefits of change to existing clients and market themselves powerfully to new clients will be the ones that survive and thrive.
The implementation of RDR has, undoubtedly, put increased pressure on advisers and a large number of firms have struggled to meet the qualification requirements. Many have inconsistent advice processes and unclear charging structures and, in some cases, their margins are just too small to deliver the kind of value-added client service that is necessary in the new world. It is not as if we have not known this day was coming – firms have had plenty of time to work on their client propositions and prepare accordingly. It is clear that weaker business models will come under severe revenue pressure.
Providers
I expect new products to emerge and I am confident we will see a number of product providers starting to distribute directly to customers in 2013. Product providers will have to find new ways to retain and attract clients, and they will need to reinvent their business models in order to secure distribution.
RDR will force product providers and life assurance companies to find new ways to secure distribution, whether this is through restricted relationships, or buying advisory firms, investment in platforms or going direct to the customer – all are potential options. Those clients who do not want, or cannot afford, advice may end up having to go direct.
In the midst of all the sector transition, some advisory firms will innovate and look at how they can operate differently, setting themselves apart from their competition. As a result I believe we will see new products and services starting to emerge, especially towards the end of 2013.
These products and services will be geared towards the specific needs of target clients or defined groups of clients. There will be greater demand for services such as lifetime cash-flow forecasting, products for people approaching retirement and bespoke family protection and estate planning solutions. Business development opportunities will exist and innovative firms will look to meet these differing needs, with the potential to flourish beyond this year.
Consolidation
It will be another year of consolidation. I think we will see a number of businesses failing, and others simply will not feel confident battling forward on their own. Others will realise the value of becoming part of a larger entity with the resources and management capability to support their transition. Some individual advisers will decide to leave the industry all together.
We expect to see revenue impacts from RDR. The new financial resource requirement changes that were initially deferred but will start to be phased in from the end of this year will further affect those firms which are already struggling financially, and these will be the ones that are either taken over or cease trading.
There is still some confusion within the industry around the interpretation of certain RDR rules and resolving this may involve some pain for the parties involved. We will also see the transition of regulatory oversight from the FSA to the Financial Conduct Authority. The body will have greater powers than its predecessor and many advisers are not aware of the far-reaching implications of this subtle, but significant, change. The regulator has already announced its intention to conduct a range of thematic RDR reviews in 2013. If unprepared this could prove another very challenging period for the advisory sector. Expect it to be a busy period of further ongoing regulatory intervention.
RDR has really positive implications in the medium term but with it comes considerable pressure to change and adapt. It will be the firms most prepared to adapt that will grasp the considerable opportunities to grow that will surely follow.
Roger Brosch is chief executive of Foster Denovo
Key points
* RDR has proved expensive and time consuming for most advisers, and many found themselves embroiled in huge amounts of administration and additional training.
* During 2013 it is inevitable that we will see more businesses failing within the sector.
* There is still some confusion within the industry around the interpretation of certain RDR rules, and resolving this may involve some pain for the parties involved.
