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‘RDR 2’ carries big risks for independent advisers

John Lappin

Will 2014 be the year when investment advisers finally come to understand what the move to clean share classes will mean for them, their clients and the structure of the market?

A recent report by technology firm IFDS and CWC Research, appropriately titled Call my Bluff, begins to provide some pointers.

It is well worth a look, and although I am not going to summarise it here, a couple of crucial points grabbed my attention.

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Clive Waller, the report’s author, believes the reforms could well drive restricted propositions. Bigger fund managers will want to see increased certainty of fund flows, and better deals could be offered to restricted players as a result.

The risk is that this could leave IFAs out in the cold, unable to access the better share classes.

Discussing this restrictive trend, the report says: “The residual IFA market could be marginalised. More are likely to move to passive strategies, as it will be hard to demonstrate the benefits of independence when share prices are higher.”

It also seems likely – although it is not spelled out in the report – that Hargreaves Lansdown will be making much of the fact it will offer cheap access to many of the top managers. After all, why wouldn’t it?

The firm’s emerging new model may not be without business challenges, but its publicity engine will certainly be in a strong position to get the cost argument into the public consciousness.

It may be too early to say how this plays out in terms of HL’s competitors from left field – in other words, the big stockbrokers. However, it puts them in a favourable light compared to the big restricted players: first, if it is significantly and obviously cheaper; second, if these restricted arrangements mean fund managers offer the second or even third rank of their fund management expertise.

What if it becomes clear that the restricted adviser/platform/fund manager arrangement is designed mainly to defend margins?

Whatever the impact on restricted players, these market developments throw a spanner in the works of other investment advisers (and perhaps investment brokers, who have traditionally made much of their investment credentials). It certainly applies if they are shut out of the best deals – and the public becomes aware of this.

Their approach could be further undermined if myriad share classes frustrate easy switching too.

Of course, this is only one scenario. There will be a huge amount of confusion first. Independent investment advisers could be immune from the trends for a host of reasons. They may put faith in their investment proposition, and it may have already earned the faith of clients. New arrangements may be constructed between small and medium-sized fund managers and small and medium-sized IFAs. Independent advisers may group together in new ways to create buying power. The price shake-up may not prove as fundamental as expected. The networks’ restricted ambitions may flounder in the face of member opposition.