By Nick Eatock, CEO at intelliflo
When the Retail Distribution Review (RDR) took effect almost a decade ago, it was accompanied by a chorus of warnings, worries, hopes and predictions. As we approach the 10th anniversary of its implementation on New Year’s Eve 2012, we look at the way it has played out, which offers some useful lessons and insights.
The rules aimed to raise the standard of financial advice and reducing mis-selling. At the centre of RDR was the requirement to obtain appropriate qualifications. It also ended almost all commission payments by investment and pension providers to advisers selling their products. The Financial Conduct Authority (FCA) believed the presence of commission created a conflict of interest, increasing the likelihood of advisers recommending products based on the amount they would be paid, rather than their suitability for the client and risked poorer outcomes as a result.
The industry feared that an unintended consequence of RDR would be an exodus from the advice sector and further widening of the advice gap. Advisers warned that many would leave the industry and firms would raise their fees in order to comply with the new requirements, driving a shift upmarket that would make advice less accessible to the mass market.
Expectations vs. reality
In reality, although there was an initial drop in adviser numbers, with some taking early retirement rather than sit for the qualifications required under the new standards, this proved to be relatively short-lived. FCA figures show that adviser numbers have actually edged up slightly from 35,000 in 2012 to 36,674 in 2021, although it is likely that some advisers left prior to 2012 in anticipation of the changes.
However, fears that the cost of delivering advice would rise have broadly been realised. In its 2014 RDR post implementation review, the FCA said there was “evidence that adviser charges have increased in some cases (certainly, there is no notable evidence to suggest that these have fallen), and lower product charges may not offset this”. In addition, the Personal Investment Management and Financial Advice (PIMFA) trade association estimated in 2020 that Financial Services Compensation Scheme levies and Professional Indemnity Insurance costs had each risen for some firms by at least 100% over the previous five years, which has inevitably affected the cost of advice.
With the hourly charge for financial advice averaging at around £150, according to MoneyHelper estimates, it remains unaffordable for a vast proportion of the population. The 2021 OpenMoney UK Advice Gap report found that just one in 14 people had paid for advice in the prior two years, down from one in 10 the previous year, with one in eight saying they would pay for financial advice if it cost less.
Filling the gap
Hopes that so-called ‘robo-advice’, or digital wealth management services, would play a significant role in narrowing the advice gap have come to little. While assets managed by robo-advice services are rising slowly, in its 2020 evaluation of RDR, the FCA found that they represented less than 0.5% of the retail investment market. It said that although those services were “priced at a level that should make it more accessible to mass market consumers”, they were used primarily for those able to afford traditional advice.
But increased use of technology in the advice process does remain a source of optimism when it comes to closing the advice gap. Fully automated services may have fallen short of expectations, but hybrid advice models that blend digital and human interaction are now emerging, with potential to deliver simplified advice for those with straightforward needs as well as traditional advice where there is greater complexity and/or more to invest.
With the pandemic accelerating the process of digital adoption among both advice firms and consumers, advisers are already using technology that can help make advice more accessible. The use of videoconferencing is an obvious case in point, but advisers can also use software including asset allocations tools and automated suitability reports, while client-facing technology such as client portals help maximise efficiency and add value.
The power of technology
Technology has a major role to play in helping firms keep costs under control and ensuring advice remains affordable. The FCA noted in its 2020 RDR evaluation that there remained “significant scope for technology to further assist firms when providing advice to consumers and help reduce the costs involved, making it more affordable, or to deliver other support services to meet consumer needs”. It cited one firm’s disclosure that “used properly”, technology could cut the time taken to prepare an ongoing review from six hours to just 45 minutes. Another firm reported that advisers fully adopting technology posted twice as much revenue.
This ties in with intelliflo’s eAdviser Index, which measures customers’ business metrics against their use of intelliflo office. The most recent analysis found that ‘Champions’ – firms that are maximising their technology use – generated 44% more revenue and 59% more ongoing revenue per adviser and have 28% more clients and 48% more assets under advice than ‘Explorers’ – firms not yet fully using all available functionality.
With othercosts continuing to rise for firms, embracing technology can maximise efficiency, helping offset any increases in the cost of delivering advice to maintain affordability for clients. And as technological development continues to accelerate, it will become ever more key in ensuring that the more professional advice sector that emerges can serve a wider range of people.