What does the RDR platform review mean for your business from January 2013?

The FSA’s industry wide consultation on platform regulation will have a wide impact on adviser businesses with an estimated 98 per cent of advisers using platforms and £135 billion of assets already held on platforms. So how will the FSA’s proposals on platform regulation post RDR affect you?

We have lined up three key industry experts to look at the impact on platforms and answer your questions about the new regulations, which will come into effect at the end of 2012.

The requirements of RDR are likely to push intermediaries even more towards platforms. So the FSA’s recommendations for allowing advisers to use one platform for most clients, the move towards unbundled charges are expected to have a wide impact on the implementation of restricted advice and independent advice business models. The consultation paper published on 17 November has renewed the debate. The industry remains divided over the key issues of adviser charging, fund manager rebates and transparency.

Are we likely to see more lobbying and regulatory uncertainty as the consultation process unwinds? If the latest FSA recommendation turns out to be a compromise could there be further change ahead? And should advisers continue to embed platform technology in their businesses to drive efficiency in the run up to RDR?

Log onto our live WebTV show with Martyn Laverick - Managing Director at JELF Financial Planning, Danny Wynn – RDR and Commercial Director at Legal & General and Dan Saulter - Business Development Director at Towergate Financial as they answer your questions about what the new regulations mean for your business from January 2013.

Martyn Laverick, Danny Wynn and Dan Saulter join us live online on 9th December 2010 at 2pm   to discuss RDR and the latest Platform Consultation Paper  

For more information visit http://www.legalandgeneral.com/advisercentre/

H: Jayne Constantinis, host
A: Danny Wynn, RDR & Commercial Director, Legal & General
B: Martyn Laverick, MD, Jelf Financial Planning
C: Dan Saulter, Business Development Manager, Towergate Financial

H: With the retail distribution review consultation process well underway, what will the RDR Platform Review mean for your business from January 2013?

Titles

H: Hello and welcome to The Business Show. I’m Jayne Constantinis. The FSA’s industry wide consultation on platform regulation will have a wide impact on advisor businesses. With an estimated 98% of advisors using platforms and £135 billion worth of assets already held on platforms. So how will the FSA’s proposals affect you? Well, the consultation paper published on the 17th November has renewed the debate. The industry remains divided over the key issues of advisor charging, fund manager rebates and transparency. Could there be further change ahead? And should advisors continue to embed platform technology in their businesses to drive efficiency in the run up to RDR? Well, joining me today to discuss this is Martyn Laverick, Managing Director at Jelf Financial Planning, Danny Wynn, RDR and Commercial Director at Legal and General, and Dan Saulter, Business Development Director at Towergate Financial. Welcome gentlemen to all of you. Coming up today, the consultation process, the key issues and all of your questions answered. And don’t forget we are live today, so if you want to get your questions answered, use the box on your screen, put your name on in please as well, and if you’re on Twitter, use the #studiotalk. So, let’s begin if we may, Danny can I ask you, where are we in the process, we’re about what? We’re four years in now?

A: Yes, we’re four years into the RDR process, each policy area of the RDR goes through 3 phases. There’s the discussion phase, where the FSA issues a discussion paper, where they talk about the problem they want to solve and their initial thoughts on solving it. We’re had that for the most of the areas of the RDR, I know we’re way past that when it comes platforms, we’ve just come out of that phase. We go to the consultation phase, where the FSA have listened to the industry, refined their thinking and come up with more firmer proposals and for the platform paper which we’re really here talking about today, that’s the phase we’re in now. Typically, and for all the other areas of the RDR, there’s been quite big changes between discussion and consultation, and we’ve seen that this time on the platform paper, especially around rebates and remuneration. The next phase will be policy statement and we would expect that probably to come out end of March/April time next year.

H: So presumably all of you have contributed to the consultation paper

B: Certainly have

H: And a large number of people? Has there been a good turn out so far?

C: I don’t think so now, I think that’s part of the problem. There hasn’t been a very big response. We’ll be putting our response in in the New Year

H: That’s interesting, why? Why haven’t a lot of people been responding?

B: I think a lot of people have relied on trade bodies, IFAs being relied on if they’re part of a network, but I actually don’t think this time that’s good enough. I think everybody has a responsibility to put a response in and 80 was the number of responses last time and I think if IFAs do not put a response in, they will get the legislation that is going to hit them.

H: Dan, let me ask you from the perspective of an advisor, what are the main issues that have come out so far?

C: There’s a whole heap of issues that have come out so far. I think from Towergate’s perspective, and I think this is the same for many advisor firms, I think advisor charging, and platforms ability to facilitate advising is a big issue coming up. Fund manager rebates is an area that’s exercising many firms across the industry presently, and also the FSA’s stance on whether a firm can be independent and adopt a small number, or a single platform? Those are the three areas for us that we’re watching with interest and will have an impact on our business

B: I think those will be the 3 areas for most IFAs at this present moment in time. There’s been a bit of clarity in the paper, but I think that’s why I’m so keen to get people to put a response in, I think that there’s still a lot of work to be done. If you look around, particularly in the rebate issue, I think in its current format it’s not workable. I think what the FSA’s proposals are with regard to passing rebate back to clients in the form of units on platforms is just not acceptable, so that would need to change.

H: So what is it, the proposal that’s not workable, or the mechanism?

B: I think the mechanism of delivering that isn’t actually possible. I think if you talk to the fund managing groups, you talk to the platform providers, that’s an area they don’t want to go down. As an advisor, we certainly don’t want to be having to sit down and work out capital gains tax calculations for small numbers of rebates for a client if they’ve held a fund for the past 5 years and there’s a little rebate coming in every 6 months, that’s a cost to the client and that works against where the RDR’s trying to go, so I hope that the FSA listens to the responses that get put in and understand that their proposals work against the best interest of customers at the moment.

H: And what about independents? That’s at the heart of this and this is one of the reasons the FSA was prompted to begin the consultation in the first place.

C: I think we concur with where they’ve got to in the CP, in the paper that’s come out. They’ve taken the view that an independent firm, if they segment their customers carefully and appropriately, could adopt a single platform for that customer segment. So conceptually for a wealth management firm that just deals in high net worth space, they could adopt a single platform, if they can show diligent process of how they selected that platform. I think for a firm like Towergate where we have multiple customer segments, ranging from the mass market, mass affluent and high net worth, we may choose to adopt more than one platform, but one platform in each segment and I think we broadly support where the paper has got to in that area.

A: Yes, I think that’s quite key because in the press is was put across as the FSA have changed their stance on independents and platforms, and they absolutely haven’t, they’ve been incredibly consistent all along

B: Just clarified

A: Yes, they clarified, but used slightly different language I think which is why people have assumed it’s a different direction. They said all the way along, it’s driven by your customer segmentation, if you happen to have a homogenous customer bank then the chances are that one platform will be the right platform for all of them, if a platform’s right at all of course. If you’ve got a variety of different customer segments or different propositions that you’re offering to different customer segments, then you have to take a decision, as you say, around each proposition segment on what the right platform is. If that happens to be the same platform for each segment, then fine, but you need that audit trail, because that’s going to be the real shame. If in 3 or 4 years time the advisor and the customer really, really happy with what’s gone on, and then the FSA turn round and say where’s the audit trail? And if you haven’t got it…and I can see a lot of small firms having trouble.

C: I think diligence of platforms is an issue that all advisor firms should be very careful of and it isn’t just financial stability, it’s about a whole range of things. It’s also about their ability to get ready for RDR

A: Oh absolutely!

C: And picking a platform today that isn’t committed and ready for one of these changes against RDR

B: And how do you know that? They’re totally committed to the UK until the moment they’re not!

C: Yes!

B: So you can do financial due diligence on these people but how do you know how much skin in the game they’ve got?

C: Well, you need to take a view, Martyn, you need to take a view, the best view you can, and ultimately you need to know that your customers can get off that platform, as part of the contract with the platform

B: And I think one of the good things about the paper as in the financial accuracy, making sure there’s sufficient money sitting with the platforms to allow run off. The question is, do you know many IFAs that have a homogenous client base, where everyone’s going to fit on one platform? I don’t know many IFAs that would fit that at all.

A: I actually think there’s a surprising number of IFAs that, in recent years have become incredibly selective about the customers they deal with i.e.: they know who the target customers they’re going for, and they’re the customers they have been developing relationships with. And I think, bear in mind we’re in an industry of 8000 firms, the average number of advisors in a firm is 4 across the industry, ok, we’ve got firms like yourselves who have many more times that, but there are lots of firms with only 2, 3, 4 advisors, who do genuinely deal with a specific type of customer, from a certain type of area, where it wouldn’t be surprising at all if they did their segmentation and diligence, they found that actually there’s one platform that’s consistently right across their customer bank.

C: I think, Martyn, it’s being consistent for certain types of solutions, isn’t it? I mean, we’re not about to buy a platform to buy annuity, it’s a need, if you open an insurance company you buy annuity. I think for us, investment and pension customers, single business, I think within a broadband, there’s a platform that works for many customers. But you’ve still got to be flexible, you’ve still got to have relationships with many, many providers.

B: I think it’s…again, you’ve got wider knowledge of IFAs. I know our business, I know the type of clients we serve, and ICI’s having limited number of platforms – certainly not a lot but a limited number of platforms in order to serve the segmentation needs, but again, I’m not quite sure how many IFAs have thoroughly gone through their client base and can be really clear on their customer segmentation, in order to where a platform may fit in there.

A: It just comes back to the audit trail issue. It’s just so important. We know that if you haven’t got the paperwork, whether you were right or wrong it doesn’t matter, if you haven’t got the paperwork to justify it, you’re opening yourself up to retrospective decision making down the line.

C: Clearly, the regulator must want a better outcome for customers here, as part of doing this one would assume, and to adopt 20 platforms as an independent advisor, you wouldn’t be able to get the best deal from your relationships, and to get the best deal from those relationships, you need a small number of relationships and that way you can pass the benefit through to your end customer, and that has to be a good outcome

H: Better outcomes for customers and better protection is the motivation for the whole thing isn’t it?

All: Yes

H: Just let’s go on to advisor charging, what’s the mood of the meeting on that one?

A: Well, I think if we look at what the FSA have proposed, they’ve basically said platforms with administering advisor charging, have to adhere to the same rules that providers do when administering advisor charging out of their products. I think that consistency should be welcomed, and at headline level, it’s not a big issue. The platform just needs to capture confirmation of validation from the client that they’re happy to have the deductions made from their portfolio which sounds perfectly reasonable and is perfectly reasonable. I think where some of the additional costs come out of this, is where, let’s say in a years time the advice firm decides to change it’s charging structure. All of a sudden, between them and the platform, they need to write to every client, confirm and validate that change, whereas today I know it’s common practice for platforms to accept the instructions from the advisor that the charging structure has gone up from 50 to 60 bips, say, and implement it

B: The concept you have to write to your client as the IFA is a totally correct one

C: As is the case now

B: Yes, and I think somehow within this process, we must be able to have a workable solution where we have validated it with the client, and then you receive that and then you can confirm back to the client. There has to be a sensible process in there that allows us to facilitate that

A: I totally agree. I think it’s not particularly complicated to do, but I think the whole advisor charging piece does 2 things. It’s adding cost into platform businesses, and there aren’t that many platforms out there that are running on really healthy margins, where they can start absorbing all this extra cost. The second issue is that all of a sudden, we start to see legacy issues within platforms because they’ve got customers with one set of units they’re paying commission to and from, another set of units that they’re having to calculate advisor charges on and what happens when do a funds switch, from a pre-RDR fund, so out of a UK equity index fund, to another type of UK equity index fund and you’re effectively turning off one set of trail commission of there, which the platform has then got to work out and replace with another set of advisor deduction on the next unit.

C: I think where you’re going there, is that clearly if there’s 35 platforms today, there might be 40 tomorrow, then obviously we’ll survive, it’s just where it’s heading. There’s going to be an amount of work platforms need to be doing, and therefore scales are going to become even more important

A: I think more generally, and it’s the remuneration piece around rebates I’m sure we’ll talk about that which really drives and makes it a scale game, I believe anyway. I think with the advisor charging piece, what it’s helping to create is legacy issues within these businesses, where all of the sudden the costs start to increase. It has the potential, I’m not saying it will, because of lot of platforms are based on quite new modern technology, which might help them overcome this, but it might start to create the costs and maybe have the service level impacts that are often levied at providers.

H: Now here we are talking about what’s going to happen in practice and extra admin and so on, but to what extent are things likely to change between now and actual implementation at the beginning of 2013

B: I think if you look at advisors and advisor models, you have very clear defined propositions, advisors will have identified where they add value to their clients and also the role of a platform within their proposition as well. So I think you better go to IFAs and the difference you’ll see is very clear clarity on what we’re offering the clients, how they’re charging and how they’re delivering it. I hope that what changes between now and then is that the regulator listens to the feedback on this current paper and they do change their stance on rebates and allow cash rebates into the client cash account. Both Dan and I work for large firms and we’d like to be able to exercise our distribution scale for the benefit of our customer, and at the moment it won’t allow that. So we hope – or I hope – IFAs will go back and the FSA will listen to what is being said.

H: So if your prediction is right, who are likely to be the winners and losers come implementation, is it going to be you, the big boys, or the smaller IFAs?

C: I think kicking off on that one, whether it’s platform distributor or advisor firms, it’s he that understands the customer, and as a proposition, that’s going to add value. This whole RDR programme is about unbundling and being transparent, so the customer’s going to see what he’s paying for and from whom. So an advisor small, be it small or large, that can demonstrate significant value to his customer is going to win. And the firm that doesn’t get that right, isn’t going to win.

H: We’ve just got time to take one of the questions – a couple of the questions that have come in. One from Martin Bamford, who’s also tweeting out there. Martin wants to know, “How will traditional product providers survive in the future with a growing proportion of assets being invested using platforms and wraps?” You’ve just said that a few won’t survive, what’s your perspective on that?

A: Well, I think from a provider point of view it’s no secret, and we all expected that the RDR measures in the round, you would expect margin pressure from the product providers. Certainly in the traditional products we sell. I think, what isn’t widely recognised is that we would also expect improved persistency in our products going forwards, so whilst there might be margin pressure, the improved persistency would help offset some of that. To answer Martin’s question more directly, I think what we might also see is that whilst product providers can no longer use their balance sheet to perhaps smooth the cost of advice for customers, which is effectively what happens with factored commission, they’ll start to use that balance sheet strength in other ways, so perhaps for example, better more valuable guarantees, protections, investment products, smoothing with an investment product, self-balancing with investments, so just using their balance sheet in a different way. In this industry, there are very few businesses that have strong healthy balance sheets

B: Innovation. Product innovation

A: Yes. It will be looked at as how can we use that key differentiator we have – that competitive advantage that we currently have and if we’re not careful we’ll lose it, so we need to make sure we use it wisely to keep us in the game. And we’ll see that, we’ll see some providers out there saying what we’re going to do is we’re going to own different parts of the value chain

C: What do you get out of it…

A: Yes, so some providers have gone and bought wraps, they’ve gone and bought distributors, technology companies, others are investing in scale, so resolution. They’re buying lots of business, and they’re creating this really big scale business so that they can live off of the smaller margins, presumably that’s part of their strategy. Others will invest in getting really strong pats back where life companies traditionally played which is in the investment solution, the tax wrapper was just a way of getting those in. So I think we’ll see different types of strategies, but it all be around the fact that they’ve all currently got strong balance sheets.

H: That seems like good news for customers.

A: Well, the fact that we’re no longer going to be concentrating on working out how we use our balance sheet to pay commission and we look to use it a different way, hopefully for customer benefit, then hopefully it should be

B: I agree, that’s a great solution

C: And as a provider you’re going to be looking at a product provider going is his product good? Whish is what you should be doing.

H: Yes. Time for a quick answer to this question if you could. The person hasn’t left their name actually, so Mr X or Mrs. X, “What fee model is going to be workable?” Can you answer that in 15 seconds?

B: I think from an IFAs point of view, it’s one that’s very clear, transparent and adds value to the client. Simple as that.

C: I agree entirely. If the customer can see value in what you’re doing, he’s going to pay for it

H: OK. And finally what should IFAs being doing, what should advisors be doing, right now if anything – or maybe it’s too soon – to be getting themselves in good shape for 2013?

B: From our perspective, again, define your proposition, look at how you’re going to deliver that proposition, where your margins sit within that, qualifications advisors…literally, there’s a whole toolkit, there’s a lot of toolkits, I know Dan’s firm has got one, that it’s a good idea if you follow. There are steps that are laid out there, some very good steps for IFAs to follow and if you’re not following those at the moment, you’ve got a problem, so you really do need to start getting on to it straight away

C: Some of this really is noise, because you’d be doing this anyway as a firm. Getting close to a customer, charging fees, getting value across to your customer, you should be doing that regardless. This maybe just gives advisors the impetus they need to get on with doing it.

H: Thank you very much. Thank you. Interesting. I hope you found that useful and interesting, but if you’d like more information then you can go to www.legalandgeneral.com/advisercentre. Thanks for watching. Bye bye.