The RDR (Robbery of Distributors Revenues)

You will have heard of Christopher Columbus the pioneer, navigator and explorer, whose determination to find a new route to Asia ended up with the discovery of the Americas, but you may not know that he was one of the most gifted salesmen who ever lived.

To achieve his exploring ambitions he convinced the King and Queen of Spain to finance his expensive voyage across the seas to completely un-chartered territories. It wasn’t easy: Ferdinand and Isabella of Castile, Spain, had originally rejected this enterprise on grounds of cost.

How did he get the Spanish King and Queen to change their minds? He was a master salesman who had done his homework, he was a superb rhetorician and he was highly gifted at awakening feelings of excitement and interest in others.

What else would have convinced the Spanish monarch to finance an incredibly costly trip, where the acquisition team may return empty handed – if they even returned?

In terms of returns, let’s just say that this wasn’t a structured product she had purchased with some element of capital protection.

Still, the Spanish Queen handed over the required financing and her blessing and, on the evening of 3 August 1492, Columbus departed from Palos de la Frontera. He didn’t find the trade route to Asia: he discovered what would become America, a far more lucrative continent and thereby created a whole new race for gold, spices, land and glory. But that’s another story.

What people want isn’t always what they need

The average investor is not a royal family in pursuit of the fastest, most profitable trade route to boost their coffers. But the reactions of the average investor will be the same: they will prick up their ears and find their hearts racing more at the sound of a rare, exciting investment that offers a high percentage return.

Very few investors will find themselves enthused about a tailored financial plan that outlines how they can hit their long-term goals while providing some form of capital preservation. Much less are they likely to be happy to spend £1000 to £2000 a year on the advice process for this.

While this may be exactly what they need, advisers offering this tailored investment product will need to be great salesmen – someone who can convince people that paying for advice is the best way to get the best outcome.

The retail distribution review means only those who can ‘sell’ the intangible concept of service will survive. Some of them are already calling themselves “lifestyle coaches” and the regulated products are merely an addition to their client coaching service.

Existing clients with high trust levels are unlikely to object strongly to a different method of paying for the same service, particularly if the total cost is the same and they are using their highly skilled, known adviser.

However, just as the rest of the world moved quickly to compete with the Spanish for control of the Americas, so too providers are moving to compete on cost and volume with IFAs.

But what about growth after RDR?

How many advisers will be able to market to, and compete for, a new client when a tied or “whole of market” adviser can appear free because the cost of advice is absorbed somewhere in the depths of the product providers’ offerings?

In a normal ‘law of competition’ environment, IFAs would usurp the institutional behemoths in the same way that most retailers control most manufacturers in all sectors of our economy, which aren’t regulation driven.

However, it seems the profit has been ripped out of the advisory profession and there is a danger that the only way to continue to make money is to be linked to a provider. To survive, most advisers will need to claim a share of the profit from the manufacturing end. They should not wait too long as the manufacturers are moving back into the advising sector.

Is the RDR really about better advice and better outcomes for the consumer or is it about crony capitalism enforcing providers’ control of the client’s money?

Of course we have seen clearly since 2007 that the heads of these behemoths seem qualified or experienced enough to run all this money – although it tends to run away from them. Just look at what has happened to the banking, insurance and others recently.

Was Ken Davy, founder of Simply Biz and the so-called ‘father of networks’ right when he warned the providers that “assets have shoes”?

Is it not very dangerous to say that sales output is fundamentally wrong as a method of measuring the contribution that an adviser or indeed any business makes to society?

Andrew Carnegie once said: “Able men soon create capital; in the hands of those without the special talent required, capital soon takes wings.” It didn’t escape from Columbus; is it in danger of escaping from government funded behemoths?

There are ways of working with providers to help present a tailored lifestyle option to clients, for which they will happily pay and which will give them the best possible outcome.

With this in mind, you may be interested to check out a complimentary seminar outlining all about the discretionary fund manager propositions, which will be held at the Financial Adviser head office in London on 21st September.

To book a spot, email fa.letters@ft.com or visit the Financial Adviser page of the FTAdviser website (www.ftadviser.com/fa) for more details.

Also structured products now seem to be called “defined investments” and in-depth analysis into each new release is freely shared at www.structuredproductreview.com

I’ll admit: my view may be contrarian and maybe there’s a place for provider-led as well as truly independent product advice in this new RDR world. I’d like to hear your views here.

4 thoughts on “The RDR (Robbery of Distributors Revenues)

  1. Yes abolsutely right, technocrats with no idea how to advise the private individual or business financially being given carte blanche to ruin the industry

  2. Nice article, can’t argue with teh salesman analagy and rhetoric, but 1 minor flaw – columbus didn’t discover the Americas for the Europeans – The Vikings did. 🙂

  3. Anybody who thinks they will survive longer than a couple of years as IFAs must be MAD.

    The regulatory system is run by risk averse stalinist group who whilst being unaccountable to anyone, including parliament are continuing to manufacture prescriptive and contradictory rules whilst telling the wealth makers in the private sector how to run their own businesses. It doesn’t work!

    That’s why we’re in the mess we are all in.

    It’s all corruption and has a political agenda.

  4. I’m not sure you are a contrarian – a true contrarian migrated to fees well ahead of the flock years ago. A true contrarian foresaw the property crash – the forum known as housepricecrash had threads entitled ‘the coming credit crunch’ back in 2004! That’s contrarianism. A true contrarian now suspects the economy is about to boom again as we go into 2013 ( not remain flat and steady as the idiotic sheep talking heads on the BBC are saying – why do experts always get it wrong? Remember these are the very same who did not foresee the credit crunch whereas lowly subjects on little forums did foresee precisely what was going to happen).

    I was an IFA, but am now a mortgage broker and have always been largely fee based. I love doing the opposite of the crowd. If people perceive there is a value in a village blacksmith, they will pay for his services, however if they perceive too little value, they like you will cease to use the service.

    Personally I disliked being an IFA, not because I wasn’t a success, I was, but because the whole commission model always felt corrupt and rancid to me, after all how would you feel if your GP recommended products and actions based on payments made to him by drug companies? How would you feel if your lawyer’s income was based upon legal indemnity insurance products he sold you?

    The commission dinosaur was a passing bandwagon, and a rancid one at that. For example truly independent advice would be to recommend uber low charging investment products such as reputable ETFS, which pay no one anything really.

    PEOPLE WILL WILLINGLY PAY FOR A SERVICE THAT CONFERS TRUE VALUE AND EXPERTISE – I mean real expertise, not tick boxing and bland reports from a platform. So for example a real handle on precious metal investing a couple of years back would be an example of properly valuable advice.

    Most IFA’S I have met have no true and unrelenting passion for proper investing, the sorts of things real investors want to hear about. Flogging an AVIVA BOND is hardly ground breaking and requires no expertise at all although of course there is room for safer BUT LOW CHARGING investments. As an example on any course or convention you will see IFA’s reading footie pages and so fourth, they do not have their snouts buried in the FT seeking out and hovering up ‘insider’ investment information as they are so sheep like in their whole outlook, offering tired old insurance bonds and peddling commission paying packaged ‘investments’ from L&G.

    So you wanted my thoughts – a bit of a ramble I’ll admit, but I just see the world differently to the IFA robots I meet.

    The blacksmiths need to find something else to do. Make yourself a tower of investment knowledge in the way a consultant surgeon is perceived. Make investment knowledge your passion, not some tick box robotic selling exercise.

    Cheers and good luck

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