Retail Distribution Review One Year On…
You Are Likely To Be Familiar with the retail distribution review. It came into force at the beginning of last year and, from an ETF perspective, was anticipated to boost the ETF market to US-sized proportions.
In Europe, ETFs are predominantly used by the institutional market, estimated to be well in excess of 70 percent of the market. In the U.S., financial advisors and retail investors represent half of the market.
However, the expected explosion of UK retail investors into ETFs did not materialise. Instead, advisors embarked upon learning about the products at a slow pace, while investors eyed new fee-based models with suspicion.
2014 is now being described as RDR 2, and many are calling for the anticipated explosion in growth to occur now.
What Happened and Why?
When RDR came into force in January 2013, its focus was on several key aspects of the distribution of retail investment products, including advice, standards of professionalism, advisor charges and platforms.
The biggest changes include the removal of commission based sales and the adaptation of some platforms to accommodate intraday fund pricing, which is expected to make ETFs more attractive.
Why has uptake been slow? Adam Laird, passive investment manager at online platform Hargreaves Lansdown explains that one issue investors face is having to pay a fee upfront for advice.
"Investors have not liked this, but it does mean that they can be clearer on what they are getting for their money," said Laird.
Those with smaller portfolios are also enduring a rocky ride. The upfront fee, which is often a percentage of their assets or an hourly fee, is off-putting and some investors are unable to afford it and therefore no longer seek advice.
This however, has prompted the rise of do-it-yourself investing through services like Nutmeg, Barclays Stockbrokers and Interactive Investors, which has forced down the price of advice. According to Hargreaves Lansdown, the "typical" cost of advice is either 1 percent upfront and 1 percent ongoing, or 3 percent upfront with between 0.50 – 0.75 percent ongoing.
Another issue is that many advisors initially did not like the changes that were being made because in some cases they have had to re-qualify.
RDR permits that financial advisors looking to give advice under it obtain the level four qualification in financial planning. When added to the improved standards of professionalism, compliance and capital adequacy, the costs start rising.
Advisors must have gained certain qualifications (and combinations of examinations) by the end of last year. This means that advisors need to have covered the content of the RDR 'core' and 'specialist' examination standards by assessment at level four or higher.
Too many products to choose
Finding the right product can also be an issue for investors. For example, funds tracking the FTSE All Share index vary in cost from 0.10 percent to 1.50 percent, and there are 15 tracker funds that are available.
"There are pitfalls with ETFs because there are a lot of products, but you can go out there and get ETFs easily. All we find is that people need help navigating through the products. They don't always know where to start looking for products," said Laird.
Feargal Dempsey, independent ETF consultant, explains that platforms and the retail focused distribution sector now need to adapt to the new world and less familiar products. "I still believe we will see huge penetration of ETFs into the retail market in the UK – and in the EU - as more move to RDR regulation."