The Retail Distribution Review is one of the biggest overhauls of financial regulation for more than a quarter of a century. Financial Management Bureau wants to help you understand what is happening, how the proposed changes may affect you – and why those changes may improve the advice you receive.
What is RDR and what does it mean for my Financial Planner and for me?
RDR aims to improve service levels and transparency and ensuring the interests of financial planners and their clients are in line.
For the Financial Services Authority, the industry regulator, RDR is about establishing a "resilient, effective and attractive retail investment market that consumers can have confidence in and trust at a time when they need more help and advice than ever with their retirement and investment planning".
Specifically, RDR sets out to ensure that, as the client of a financial planner, you:
- are offered a transparent and fair charging system for the advice you receive;
- are clear about the service you receive; and
- receive advice from highly respected professionals.
All the changes required for RDR compliance will come into effect on 31 December 2012 and will apply to every Financial Planner across the retail investment market, including independent financial planners, wealth managers and stockbrokers as well as banks and other providers of financial products.
Adviser charging and the end of commission
The most visible change for many clients of independent financial planners will be the introduction of fees for financial advice. Historically, planners have relied on commission from product providers to pay at least some of the costs you incur when you consult them for advice. Regulators have taken the view this could give rise to a conflict of interest as some product providers offer higher commission payments than others for the same solution.
All financial planners will now have to outline and agree fees for their advice in advance.
The idea is that this will make the process more transparent as it should be easier for you to work out what your planner is charging, what they are doing in return for that charge and then to compare their proposition with that of other planners.
A new definition of independence
'Independent' has always been a description that could only be used by those planners who researched the whole financial market. Under RDR, the definition of 'whole of market' has expanded and will now cover areas such as ETFs (exchange traded funds), Retail Investment Products and other more esoteric asset classes. An independent planner must demonstrate they have considered all of these products in the process of addressing your financial requirements. FMB will maintain their independent status and will always look at the “whole of market”.
Under the new rules, if a planner cannot meet the definition for independence, they will be deemed to be 'restricted'. This means they will use a smaller range of investments in addressing your financial requirements..
All financial planners in the UK – whether they are described as 'independent' or 'restricted' – will have to achieve a higher minimum standard of qualification before they are allowed to provide advice. This means an increase in the basic level of knowledge and will lead to a higher level of professionalism for the industry as a whole. They also have to sign up to an ethical code requiring them to treat you fairly.
Greater information and transparency
In conjunction with other recent legislation, however, RDR has specific rules about how clients should be treated and what information they should receive on an on-going basis. Approved individuals within each advisory business are also legally accountable for ensuring those rules are followed.
This provides you with the added reassurance that the business is being closely monitored within a regulatory framework. In the unlikely event anything does go wrong, there is both a set process and a chain of personal accountability to ensure things are put right.
Better business model
Our planners are moving to a financial planning rather than product recommending role. Prior to RDR, a planner might recommend a portfolio of investments to populate, for example, a pension or an ISA. Now, rather than recommending specific funds, say, they are more likely to offer you a comprehensive financial plan and help you keep this on track as your life changes and develops. This will involve recommending a whole range of different products and solutions, depending on what your circumstances demand.
Also, as part of the changing charging structure for planners, you will receive an agreed service standard which suits your needs.
Alongside the developments in regulation and communication, developments in financial-planning technology have taken the industry by storm. In various areas, more secure, more flexible and more user-friendly systems mean the way in which your financial plans and products are checked and monitored has improved immensely.
We can access information on your products and investments at the touch of a button.
Benefits to you
So the benefits to you will be increased confidence and trust in the advice you receive as you will know it has been recommended to suit your needs.
You will know from the outset exactly what you are paying for and you will get a higher level of technical expertise due to the new professional standards planners must meet.
We see these changes as an opportunity for FMB and have been preparing from the moment they were decided. Our philosophy has always been to put our clients first with our professionalism and high quality service which is why we have been a leading Financial Planner for the past 25 years.