So, 16 months after its introduction, how is the post-RDR UK financial services market performing?
It’s fair to say that most of the product providers managed to get through the RDR ‘gate’ to meet the 1 January 2013 deadline, albeit with a severely cropped range of compliant products.
The first quarter of 2013 was characterised by pushing through legacy pre-RDR cases, with very little of the ‘new age’ products being sold.
Half-way house
Close to expected levels of business resumed in the second quarter, with most product providers ending the year at roughly similar levels to 2012. Adviser charging, it seems, has proved to be an acceptable half-way house between a pure commission and pure fee environment.
For some of the distribution channels the pattern has been more mixed. Advisory firms comfortable in a fee-based world prior to RDR have generally had a much smoother transition to the new world than those more or less dependent on commission income to finance their businesses.
Commercial bank distributors in particular have struggled to adapt their advice processes to be both compliant and cost-effective in the post-RDR world. This has been one of the most notable impacts on the UK financial services sector, as has the shift to platforms as the channel for writing all forms of products, and the reduced number of individuals engaging in the financial advice process.
A permanent shift
As the financial services market adjusted to the new regime, for most of 2013 there was a feeling that this was a market in transition, with some stakeholders initially faring better than others, but still some optimism that the ‘stragglers’ would eventually get their act in gear and everything would settle down.
Now, well into the second quarter of 2014, it is clear that some of the market dislocation created by the RDR’s initial introduction is not temporary, and that some of the shifts that have taken place are more permanent.
The sector as a whole needs to wake up to this fact and stop waiting for normal service to be resumed. Put bluntly, there is the potential for a real ‘Blockbuster-Netflix’ business model melt-down here.
However, history teaches us that major change can invigorate and freshen-up a market, and we don’t all have to be Luddites. From a product provider perspective, what are some of the emerging key requirements to be successful in this post-RDR world?
Fundamentally there is now a need to provide products that are more flexible in the timing, form and frequency in which they will accept payments both in and out over the product’s lifetime.
Central to this, the demise of commission has reduced the demand to create separate products to meet different life-stage needs in favour of products that provide multiple advice points, allowing the product to flex to meet changing life-stage needs. The sector needs to appeal more to people who are income rich as well as asset rich.
In addition, when dealing with high net worth investors, product providers need to think beyond the traditional boundaries to provide a broader range of tax-efficient products that complement the changing retirement funding and de-accumulation life-stage phases prompted by the annuity changes announced in the UK Budget.
Early birds
The whole landscape is shifting here and the early bird may indeed get the worm. In addition, allowing all clients greater choice in how they interact with product providers via a wider choice of digital media options is also a key component of the post-RDR world.
Within Axa Wealth International we are acutely aware of the very rapid pace of change within the sector at present and the need for product innovation and development.
For example, for high net worth individuals, the open discretionary product Delegation™, which we launched in the last quarter of 2013, permits a wider range of linked assets within a Revenue-friendly structure compared to a conventional portfolio bond and meets the growing need for tax-efficient asset diversity for wealthy investors.
This is the beginning and there is an ongoing need to respond to the new UK market dynamics. In relation to the more flexible life-style features described above, research suggests a strong demand for a product that can grow and develop with the various life-stages rather than the current multiple product norm.
Whether we like it or not, RDR has changed and will continue to change the UK financial services market. The question is surely not whether to respond, but how to respond.
Blockbuster or Netflix?
Simon Willoughby is head of proposition at Axa Wealth International
