10 emerging market trends post-RDR and what it means for platforms

Financial services sector head John Salmon and the Pinsent Masons financial services sector team bring you insight and analysis on what really matters in the world of financial services.

The Retail Distribution Review (RDR) has now come into effect changing the ways in which fees for financial advice are structured; professional qualification requirements are met, and the general nature of payments made to advisers for purposes other than advice such as marketing, training and even software systems development and integration.

All of this means that product providers, platforms and advisers alike have had to reconsider their business models. Below we collect together some of the views on where the market is heading.

1 Direct to consumer (D2C)

A commonly held view is that less affluent customers will not be prepared to pay for investment advice once they are made fully aware of what they are being charged and will, if they continue to invest, seek to deal directly on a non-advised basis.

If this prediction becomes a reality, it will mean that 'direct to consumers' (D2C) platforms will increasingly want to offer propositions that give customers the ability to acquire the knowledge which they sense they lack and allow them to transact simply. But at the same time, usability cannot be completely diluted. As Andrew Power of Deloitte notes "Large numbers of consumers are not confident they have enough knowledge to make the right financial decisions and so any D2C business model must be kept simple."   

A key issue for platforms will be to ensure that model portfolios and other information-based services offered directly to the client do not move their propositions from the realm of non-advised or basic advice services to advised ones – how to simplify fund choice and help customers without selling advice. In seeking to simplify, they must also ensure that financial promotion rules continue to be met.  

2 Execution-only & B2B2C

Some are taking the view that the increase of D2C offerings will not necessarily mean that advisers will be put completely out of the picture in terms of less affluent customers still seeking to invest. Instead, the new rules, it has been suggested, will result in adviser firms extending their service propositions to incorporate execution-only platforms as a non-advised service in order to retain customers no longer prepared to pay for advice.

David Thompson of AXA Wealth has described this arrangement as 'business-to-business-to-customer' and predicted "direct investing via an advisory firm" to "boom", according to an Actuarial Post report. Holly MacKay of the Platforum agrees having said some time ago that "most adviser businesses in the future will need to have a sort of execution-only platform."

It has been floated that the benefit for the adviser in this arrangement would be an introductory fee. The Financial Ombudsman has reminded the industry that "a business needs to provide 'clear and credible' evidence that an investment transaction is 'execution-only' – to avoid the regulatory obligations that apply when providing investment advice."

3 More IFA business for platforms

For others, the RDR means more business for platforms. Alastair Conway of Cofunds has encouraged independent financial advisers (IFAs) to view platforms as "the solution" to RDR challenges. He has said that "platforms in all their shapes and sizes can hold the key to simplifying an otherwise cumbersome process: fee payment, but without writing out invoices and waiting for cheques to be sent back", according to an FTAdviser report.  

Similarly Geoff Greensmith of MyTouchstone said: “We believe that platforms are going to play an even more important role in the post RDR world as they will make life much easier for IFAs to help comply with the new regulation", according to a Fundweb report.

Care does need to be taken to ensure tax issues are understood and any disinvestment strategies to cover fees are agreed with clients.

Driven by an FSA factsheet that suggests that the use of one platform for all clients may be considered poor practice, statistics put forward by the Platforum in the second half of 2012 indicate that many IFAs have registered a secondary platform, according to an FTAdviser report.    The FSA remain concerned about customers being placed on platforms unnecessarily and will no doubt be checking suitability in the coming months.

4 Consolidation of the platform providers

Tim Sargisson of the James Hay Partnership, coming at the issue from the self investment personal pension point of view, may be suggesting otherwise. In his view 2013 will be about market consolidation with the headline comment reading: "Platforms and SIPP markets to drop 80% in 2013", as reported in FTAdviser.  

Tenet’s Keith Richards had earlier said similar things floating the figures of 8 to 10 as the size to which the UK platform will shrink.

Personally, my view is that the number of platforms is only likely to increase during 2013. I do expect consolidation but not any time soon.

5 New competitors

Tesco and Google are the names that have been raised as potential new entrants and competitors for the online financial services market. But research by Rostrum Research has revealed that just 16% of respondents to their survey said that they would "feel comfortable paying for financial advice from a retailer".

Of that number, 91% said that they would only pay up to £25-per-hour for the advice.

6 More restricted advisers

Research conducted by financial adviser rating website VouchedFor.co.uk has highlighted a conversion from 'IFA status' to restricted-advice business models. VounchedFor.co.uk's research notes that eight of the 10 biggest firms offering financial advice were now doing so on a 'restricted' basis. How accurate this is of whole of market change is questionable. While we are seeing the larger firms decide that restricted is the right model for their businesses, we have not yet seen evidence of how individual advisers will react and whether this trend will drift down to smaller firms.        

7 Partnering with comparison sites

Increased effort to keep the aggregators happy has also been suggested as a consequence of the new rules. Some are saying that new strategies are needed in order to drive traffic to execution-only sites, and that perhaps partnering with a comparison site may be the way forward.

However, others are questioning the benefits of doing so. Mark Robertson of IFA Chadney Bulgin has suggested that introducing another player into the value chain may further dilute profits and may even impact on sustainability. He says that: "There are too many people in the chain. And, for the adviser, if clients are directed to the comparison site, the reward will be reduced as commission is shared and it can get difficult", according to an IFAonline report.      

With a new comparison site www.comparefundplatforms.com to launch on January 21 as reported in the Sunday Times, platform providers will need to implement a comparison site strategy and determine the extent to which they seek active engagement with those sites. For IFA execution-only platforms, it may depend on whether partnering with a comparison site forms part of their marketing plan to win new customers or if their focus is more on providing        a multi-channel approach to serve their existing customers.

8 More 'niche' business models

A number of advisers believe that now is the time for niche market shares to emerge more distinctly. For David Hall of Yellowtail Financial Planning, this means focusing on widows and couples and shunning single males. "I don’t want to be all things to all people, and would rather be highly visible to our intended market and invisible to everyone else", he said according to a Citywire report.

Similarly, Adam Young of Dragonfly Planning has highlighted the need to tailor service delivery.  "What we are doing is pricing up service at a premium"’ he said according to another Citywire report.

9 Mass affluent client focus and in-house sales forces

If the argument that less affluent customer bases will no longer pay for advice is to be believed, then it follows that product providers, platforms and advisers will begin to focus more and more on propositions designed specifically with affluent customer bases in mind. 

Some vertically integrated firms are seen as potential winners, with their ability to deliver advice at “cost” and create margin elsewhere in the value chain. Investec has suggested that the combination of established mass affluent customer bases and in-house sales forces is the business model which is most likely to see minimal disruption arising as a result of the rule changes. "This part of the market is likely to be financially more resilient than the mainstream", it said, according to a Citywire report.

Warren Page of Towergate has noted that: "The high net worth market will be very crowded and there won't be enough advisers catering for the mass affluent".  

Ultimately we have yet to see whether clients will pay for advice and if so on what basis.  Research by J.P Morgan last year suggested a significant shift toward task based rather than on-going advice for the majority of Investors.

10 Rise of Corporate Platforms

Almost all agree that 2013 will continue the rise of the corporate platform. Not strictly a post-RDR trend but more a consequence of the regulatory changes requiring auto-enrolment of employees into pension schemes, the corporate platform presents a significant opportunity. And platform providers are taking up this challenge by aiming to provide vehicles not only for the management of employee benefit packages but also for alternative saving schemes for employees who choose to opt-out of automatic enrolment into a pension scheme.

Indicative of this general trend, Martin Palmer of Friends Life has stated that Friends Life is "recognising a significant level of demand for other types of saving vehicles, such as ISAs and investment accounts" and designing their offerings accordingly. Like Friends Life most corporate platform providers will be looking to "simplify the process" of auto-enrolment as much as they can "from an employer's point of view." 

Thematic review

The FSA has announced that it will conduct four thematic reviews this year with the first guidance having already been made available. The reviews are set to look closely at the extent which the rules on professional standards, charging, services descriptions and claims to be offering restricted or independent advice are being complied with. All of this may mean that 2014 trends may look very different.