The Retail Distribution Review is the biggest reform programme the UK financial services industry has seen for many years.
The RDR was first announced in 2006 by what was then the Financial Services Authority as a means of identifying and addresses the root causes of problems it was seeing in the market. The RDR came into force on 31 December 2012 to overhaul the way that financial institutions deal with retail investors.
The overarching aims of the RDR are to drive up the objectivity and professionalism of financial advice and create clarity over the how clients are charged for services (improving competition as a natural result). The headline reform was the abolition of commission being paid by product distributors to those administering advice which, as explained further below, has brought with it a complete overhaul in how clients are charged.
How it works
The RDR is so called because it is concerned with how institutions distribute retail investment products to investors. The RDR covers myriad investment products, ranging from life policies and SIPPs to fund units and structured products, and, as such, all manner of regulated financial services firms come under it – wealth managers, private banks, fund managers and investment managers included.
The RDR reforms were incredibly wide-ranging, but there are three key elements investors should be aware of.
Independent versus restricted
Firms which offer advice on investment products must describe the advice they provide as either “independent” or “restricted”. This can actually be quite a misleading distinction since, in the sense of the RDR, independent advice is defined as advice which covers all the retail investment products available, and the adviser having a comprehensive knowledge of the relevant market; they are literally unrestricted as to what they may recommend.
Although an adviser labelled independent may seem preferable, many firms (and IFAs) quickly adopted the restricted label simply because they are not comfortable with advising on certain types of securities, not necessarily because they are tied to a particular product provider. Restricted advice may still be unbiased and comprehensive within the parameters of what the firm offers its clients, although it may not cover the entire investment universe available. You will often see wealth managers refer to themselves as using an “open architecture” model, meaning that they are able to select investment products from across the whole spectrum of providers.
Clearer charges
Since the start of 2013, financial advisers have only been allowed to be paid for their services through fees pre-agreed with the client, with no commissions being paid by product providers for recommendations. Significantly, ongoing advice charges are now only permissible if a client is actually receiving an advisory service on an ongoing basis, rather than as a kind of standing charge.
Most wealth managers used the RDR as an opportunity to make their charging structures clearer and any reputable firm today will be providing detailed breakdowns to clients. Therefore, you may see your wealth manager charging separate fees for custody, advice, transactions and so on.
Higher qualifications
Prior to the RDR, it was sufficient that financial advisers operating in the UK had a QCF Level 3 qualification. Now, advisers must be qualified at QCF Level 4, which is the equivalent of undergraduate standard.
Many leading wealth managers have chosen to far exceed the regulator’s requirements when it comes to the qualifications their advisers hold, however. Some now have a significant proportion of Level 6 advisers in their workforce. You should not be afraid to ask a potential wealth manager about the level of qualifications its advisers have.
The RDR has been in force for a few years now and clients are already benefitting from greater transparency and higher standards of professionalism. If there is anything which concerns you about your providers in light of the RDR you should certainly speak up. All FCA regulated institutions must abide by the RDR rules.
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