RDR: A Great Many Unknowns

Rob Bailey: Yeah, good to be here.

Petroff: Now, we're going to touch on specifically some unknowns related to fewer advisers in the marketplace. There is going to be a changing business model for financial advisers and many people are expecting the financial advice industry to shrink. On top of that, there is uncertainty around how continuing education might work going forward. Also there is some uncertainty about platform fees and how clients will pay to have their money in a platform in the future.

Let's first start with advisers. Tell me about this shrinking advice industry? How is this going to work? What are the predictions?

Bailey: Well, there has been a wide range of predictions on the impact in the adviser market from the Retail Distribution Review. And I think one of the key unknowns is really the scale of that impact. We're seeing predictions suggesting that the market will shrink by anywhere between 10% and 30% and pretty much every single basis point between there. So for me it's very difficult to know with any degree of certainty the size of the intermediary market in 12 month to18 months time. But what I do know is that it is a very dynamic marketplace, it's a marketplace that has evolved over the last however many years, and it is one that will continue to evolve and adapt to the new environment.

Petroff: And what does this mean for clients if there are fewer financial advisers out there?

Bailey: Well, it’s not just whether there are fewer advisers out there, it is the quality of advice that people receive that I think is important and I think the market recognises that. There's been suggestions that advisers will only deal with people with a certain amount of investable assets and again, the figure of investable assets has been wide and varied. But I think what’s key to understand is that for most advisers they are in a holistic position. So, they are looking at providing advice across all manner of areas of investment products. And so we could quite easily see clients that have a much smaller investable amount, but have other financial needs that need to be looked after and serviced.

Petroff: Okay. Now, moving on to continuing education… Now the Retail Distribution Review rules outline that advisers will have to have a certain number of continuing education hours every year. How is that going to work? Where are they going to be educated?

Bailey: It's an interesting question. I think, the interesting point about continued professional development or CPD, is that actually this is a process which currently takes place. There is already a lot of information, a lot of, I use the term loosely, education, that is passed between fund management groups and product providers to advisers. And I think one of the outputs of RDR is that this gets formalised.

Petroff: Okay.

Bailey: So, it's formalised in terms of recording the number of hours that people are engaged with, but it makes it quite important that we deliver the appropriate value to the advisers in terms of the education that we provide.

Petroff: As product providers.

Bailey: As product providers, as fund managers, we need to be able to deliver a value to the intermediaries in terms of the information that we pass through to them.

Petroff: Okay. Will advisers be smarter, starting in 2013, because of this continuing education?

Bailey: Well, I mean, think advisers are pretty smart anyway.

Petroff: Yeah.

Bailey: They are businessmen who run their own business and they provide a lot of detailed and complex advice to their clients already. What I think will be clear is that the information and advice that they are given and the education that they are given will just be regularised and formalised.

Petroff: Now let's move on to platform fees. The FSA hasn't outlined quite yet how platform fees are going to work, because with the Retail Distribution Review they formalised how it's going to work with advisers and fees that way, but platforms, that’s still a big question mark. So, are you expecting for platform fees in the future?

Bailey: We're seeing a lot of different models that are coming out and I think, coming into the marketplace. Which of those models actually prevails, I think it's difficult, and whether there would just simply be one model, I think is open to question. What’s clear though is that one of the key objectives of the Retail Distribution Review is to provide transparency to the clients so that they can see what they're paying for, where their fees are going. I think that that will become much clearer over the course of next 12 months to 18 months with the way that platforms develop their propositions.

Petroff: Do you think that this could be more expensive for individuals in the end? Yes, it might be clearer, but maybe the cost is going to go up to invest through an adviser and through a platform?

Bailey: I think cost is a difficult question to quantify. I think the important thing is value. It’s understanding the value of the proposition that the clients are receiving, the value of the advice, the value of having their investments and products on a platform, the value of any kind of interaction… I think that's what needs to get across to clients and that we as an industry need to get across to clients, that we're delivering something that is of value. What's clear for the client as a result of RDR is that they will be paying for that value rather than having that value coming from a different channel which isn't so obvious to them.

Petroff: Okay. Thank you very much for joining me today. I appreciate it.

Bailey: You're welcome.

Petroff: That was Rob Bailey from AXA Investment Managers and I am Alanna Petroff. Thank you very much for watching Morningstar.