prudential investment managers

THE IMPACT OF RDR

March 2015

Hamilton van Breda: Head of Retail Sales

2

Background to the Retail Distribution Review (RDR) in the UK

Background to the Retail Distribution Review (RDR) in the UK

Impact on IFAs, platforms and fund groups

Impact on IFAs, platforms and fund groups

What’s happened since?

Look to the future – SA

Q&A

AGENDA

3

In the wake of the financial crisis, clear message from the political level:

Self-regulation is not considered to work

• Better regulation is necessary to avoid a new crisis of the same proportion (or

contain it)

• Aim: more efficient monitoring of systemic risks and better investor protection

• And then there is the UK…

POLITICAL MESSAGE AT EU LEVEL

4

Why?

• Retail investors subject to complex charging

• Retail investors not understanding that they are paying for advice

• Mis-selling

• Low training requirements

Aims to achieve:

• Better professional advice standards (exams)

• Better capitalised advisers (big increases in some cases)

• Improved consumer understanding of different types of advice

• Improved transparency by moving away from commission to adviser charging

through fees (reduces conflicts)

Background to Retail Distribution Review (RDR)

Took effect on 1 January 2013

5

To achieve this, the FSA has published new rules that will require;

• Advisory firms to explicitly disclose and separately charge clients for their services;

• Advisory firms to describe their services clearly as either independent or restricted;

• Individual advisers to adhere to consistent professional standards, including a code

of ethics.

UK – RETAIL DISTRIBUTION REVIEW

6

The FSA’s new advice landscape:

• Independent advice

• Restricted advice

• Basic advice

• Non-advised services

ADVICE CATEGORIES

7

No more initial or trail commission paid by product providers on new products:

• Advisers will need to set their own charges in agreement with the clients

• Product providers may offer facilities for the adviser charge to be deducted from the

investment

• Firms to provide clear, concise disclosure documents

• Banning of taking commission from a discretionary manager when such manager is

recommended

Adviser charging N/A to advice relating to business sold prior to 1st January 2013:

• Product advisers will be able to continue paying on-going trail commission on legacy

business until 6 April 2016

• Personal recommendations made on top-ups and increases – new adviser charges apply

• Cash rebates by product providers to platforms banned from April 2014 including legacy

business

RDR: ADVISER CHARGING

8

M&G pricing for direct clients has not

changed post-RDR

The higher charges represent costs of

servicing

• However, may come under increasing

pressure on this

In reality, investors may find it cheaper to

invest direct vs. via an advised intermediary

• Potential increase in direct/execution-only

business?

FUTURE IMPLICATIONS OF RDR

Investment

Management

Platform fee

(range 15-50)

Adviser fee

(range 50-100)

VAT

Advised - unbundled

225

(range 160-245)

75

30

100

20

Direct - bundled

Post-RDR pricing – direct vs unbundled advised

(example equity fund, bps)

150

9

EXAMPLES OF TOTAL COST TO INVESTOR:INDICATIVE “ALL IN” COSTS FOR A TYPICAL £120 000 PORTFOLIO

Source:FTfm, Numis via SCM Private, 27 October 2014

Advisory/discretionary managers Total basis points

Barclays Wealth Discretionary 213

Brewin Dolphin Discretionary (fee only model) 266

Coutts (1 year holding period) 377




Gore Browne 182

Hargreaves Lansdown PMS 175

Investec PMS 298

Killik Discretionary 214

Nutmeg 107

Rathbones Discretionary 230

Raymond James 191

St James Place Advisory (1 year holding period) 748




Towry (1 year holding period) 420




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• Adviser numbers dropped 25% (40 000 in 2011 to 31 000 in 2013)

• Major unintended consequence is the neglect of the mass market

• Big opportunity for the well qualified advisory business with a clear value proposition

• The economic problem:– ₤220 000pa to run a viable practice

– ₤1 500pa from 150 clients

– ₤150 000 AUM on average per client

– Only 850 000 such clients in the UK

• Further consolidation will happen

• Platform consolidation will follow

• M&G have found that the average costs to the customer have risen!

“Change was inevitable: RDR accelerated it”

(Cass Consulting)

THE UK RDR EXPERIENCE

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Report by FT Advisor:

• Prior to RDR -> 2 of 10 biggest financial advice firms = restricted basis

• Post RDR -> 8 of 10 biggest financial advice firms = restricted basis

REGULATION IN THE UK: POST RDR EVIDENCE

M&G findings:

• Firms moving to restricted = medium to large size regionals

• Of remaining smaller IFAs, not a big move to restricted

• Restricted advice the same if not more expensive

• Best brand for small UK advisors is “Independent Financial Advisor”

• Increase in networks

• UK banks biggest losers from RDR so far

• Simplified/ execution only advice models to developed

VouchedFor.co.uk warned:

• Lack of transparency

• Reduction in charges often not reality

• Recommending in-house funds over better alternatives

• Client has to compare competitiveness

12

THE IMPACT OF RDRThe UK adviser has far less time for clients

Source: Coredata research

UK adviser average time splits compared to the international average

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1. Did not meet the minimum education requirements

– SA has seen a similar decline with RE 1 & 5

2. Could not adapt their business models successfully

– Many SA advisers have been taking a mix of initial and ongoing fees for some time

3. Increased regulatory costs

– Similar SA experience

TOP THREE REASONS FOR THE DECLINE IN THE UK

Source: Cass Consulting

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There are 55 proposals covering three main areas:

• Types of services provided by intermediaries – an activity based approach in categorizing

theses services

– The customer must know who they are dealing with

• Types of relationships that may exist between product providers and intermediaries

– Also addresses the responsibility of product providers for advice and

intermediary/outsourced services provided

• Types of remuneration that may be earned by those intermediaries for their services

rendered

– Total disclosure

– Conflict of interest

RETAIL DISTRIBUTION REVIEW

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• Customers

– Know who they are dealing with

– Know what they are paying for

– Greater say in the process

• Advisers

– Independent, Multi-Tied or Tied

– Limits on who may sell what

– Equivalence of reward

• Product Providers

– Greater accountability for who is selling their product

– Greater accountability for what is sold

– Monitoring that the advice is correct

RETAIL DISTRIBUTION REVIEW IN SA

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CATEGORISATION OF ADVISOR

Source: Masthead

Relationship/Status

Fre

ed

om

fro

m c

on

tro

l(l

ac

k o

f in

flu

en

ce

)

Independent

Tied

Choice

Multi-tiedFinancial Planner

(process not product)

17

CHANGES TO THE SERVICING MODEL

Agency & Banks

IFAs

Mass

Market

Middle

Market

HNW

Lack of

proper

servicing

Wealth

Managers

INV

ES

TM

EN

T M

AR

KE

T

18

45.30%54.70%

Are you or your firm planning for the possible changes that will come about as a result of a full RDR?

Yes

No

SA FINANCIAL ADVISORY INDUSTRY: COREDATA

RESEARCH


Challenges facing SA advisors by impending RDR:

1. Changes in remuneration

2. Classification of advice between independent, multi-tied and

tied

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THE FUTURE OF DISTRIBUTION IN SA

Agents/Banks

Corporate

Independent

Tied

Multi-Tied

Independent

20

• Shift in number of independents to tied and multi-tied

• Does it matter to clients?− Existing clients− Attracting HNW clients

• Does it matter to advisors?− Desire to retain “independent” label

• Outcomes on IFA’s business: − Increase in due diligence− Increase in systems, processes, people or− Increase in outsourced services − Going back to core of services− Increase in Networks

• Prepare for greater intrusion by product providers − TCF: market conduct -> onus on product providers to assess advisors who sell their

products

REGULATION IN SA: CONCLUSIONS ON RESEARCH

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COREDATA RESEARCH

When do you think the Retail Distribution Review (RDR) will be implemented? (All)


22

COREDATA RESEARCH

Which of the following groups is most likely to be positively impacted by the changes

in the industry due to TCF and RDR?


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• We already focus on the higher end of the IFA and Corporate market

• 85% of our platform business comes from the big 4 already

• Many of our existing IFA’s will become Multi-Tied

• Helping this group survive successfully will be the major challenge:

– Initial accreditation

– Ongoing assessment

– Suitability of advice?

THE CHALLENGE FOR PRUDENTIAL

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RETAIL DISTRIBUTION REVIEW What does it mean for advisers?

Must agree upfront

fee structure with

all clients

Advisers have to

categorise

themselves as

‘independent’ or

‘tied or multi-tied’

Potential threat to

the value of their

business

Increased scrutiny

on advice and their

choice of

platform(s)

25

Major ongoing shift

of existing assets

to “clean” share

classes

Potential shrink in

the adviser

universe (and

consolidation)

Increase of tied

advisers could

reduce exposure of

Prudential funds

Transparency leads

to pricing pressure

RETAIL DISTRIBUTION REVIEW What does it mean for fund management groups like Prudential?

Impact on pricing is the critical change

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• Create an excellent client proposition

• Engage your clients in a way that suits them

• Change your sales process to an advice process

– Know your client intimately

– Set lifestyle goals for clients

– Undertake due diligence on recommendations

• Focus on business profitability

– Need to know how much business needs to generate profit

– Segmenting client base will determine level of service that clients will be offered - this will influence profitability of each client

– Segment on complexity of clients circumstance

– Willingness or ability to pay fees

– Clients own knowledge or sophistication of products

GUIDELINES FOR EMBRACING RDR

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THE FUTURE OF FAIS?

This document is for information purposes only and is not a solicitation to invest and is issued by Prudential

Investment Managers (South Africa) (Pty) Ltd (‘Prudential’) which is an authorised and registered as a

discretionary financial services provider by the Financial Services Board of South Africa, in terms of the

Financial Advisory and Intermediary Services Act (‘FAIS’) or any of its subsidiaries, which includes Prudential

Portfolio Managers Unit Trusts Limited. The company’s registered office is 7th Floor Protea Place, Dreyer

Street, Claremont, 7708. Information given in this document has been obtained from, or based upon, sources

believed to be from an accurate and timely source but Prudential makes no representation or warranty,

express or implied, with respect to the correctness, accuracy or completeness of the information and opinions.

This information is not intended to constitute a basis for any specific investment decision investors are advised

to familiarize themselves with the unique risks pertaining to their investment choices. Investors should seek the

advice of a properly qualified financial consultant/advisor before investing. The value of an investment will

fluctuate and past performance is not necessarily an indication of future returns.

DISCLOSURE STATEMENT

prudential investment managers

Economy & Finance

independent advisers

future advisers

restrictedindividual

number of advisers

restricted advice

retail investors subject

type of advice

head of retail salesbackground