Retail Distribution Review (RDR): Theory vs Reality

The 1^st January 2013 sees the dawning of a fresh new age in UK financial services.  The slate will be wiped clean with the introduction of the Retail Distribution Review (RDR) and the world will be a better place.

No longer will we see unscrupulous, under qualified, commission hungry financial advisers standing on every street corner waiting to sell us products we don’t need where the term “high yield” relates to their remuneration rather than our investment returns.  New low cost investments will now be the norm and when you want advice you will gladly pay a fee to obtain it, safe in the knowledge that you have got the best deal untainted by any external influence.

Well this seems to be what the FSA and a large section of the press has convinced a whole nation to be the case. The reality however could end up being a lot starker once the full implications of RDR are realised.

A survey carried out by JP Morgan Asset Management in the summer found that whilst 81% of households would still seek financial advice post RDR, only 13% were willing to pay for ongoing services from a financial adviser.  The irony is that investors have always paid for the advice they received through the charges levied by investment companies, it just tended to be spread over a much longer, more palatable timeframe.  From next January the ongoing charges for most investments will be less, but the cost of advice will be paid separately by the client who will either write their adviser a cheque or suffer an agreed upfront charge on their investment to pay for it.

The bigger issue for most investors should be whether they obtain sufficient value from their IFA for that extra ongoing charge.  Managing director of Saltydog Investor, Richard Webb, says “Over the past 2 years we have seen a steady increase in the number of people that are taking personal ownership for the performance of their investments and RDR will become the catalyst for a change in the way many people invest their money, with many more forced to become “DIY” investors in an attempt to avoid the upfront cost of advice”. 

Unsurprisingly a large number of investment companies see RDR as an ideal opportunity to attract the DIY investor and are attempting to seize the day with increased advertising to the public through online and national newspaper coverage.  There is absolutely nothing wrong with this as a number of these funds will provide an attractive prospect to investors. However, if you decide to go it alone and avoid seeking independent advice then this does present a potential pitfall to the uninitiated DIY investor, making the investment direct to the provider, rather than through a fund supermarket or investment platform.

It has been shown time and time again that adopting a long term “buy and hold” strategy can result in mediocre results especially during volatile market conditions.  Even if the investor is fortunate enough to choose the correct fund in the correct sectors, first time, they will need to remain active with their portfolio.   Recent research carried out on behalf of JPM Asset Management, based on discreet monthly performance over the past 18 months, showed that there have been 9 different sectors topping the table and on only 2 occasions did any sector maintain its top position for 2 consecutive months.

Having different funds dotted around “off platform” may appear to diversify your portfolio but having to physically move your money between institutions can result in delays of up to 2 weeks when you try to transfer to another fund.  There is nothing worse than investing your valuable time and effort into research only to see it wasted by this unavoidably slow administration.

The funds held on investment platforms, have increased substantially over the past 5 years.  Whilst the low cost of investing is clearly an attraction, it is often the ability to move quickly and effortlessly between different funds that make them the weapon of choice for many investors.