The Retail Distribution Review (RDR) was implemented in the UK almost a decade ago, to improve transparency in the investment industry, and to help consumers access unbiased and clearly priced financial advice.
South Africa’s long-awaited RDR legislation, with broadly similar principles to the UK, is on the horizon. Financial advisers and wealth managers are refining their business models and client propositions ahead of its full roll-out.
According to Carolyn Erasmus, Country Head for South Africa at fintech company Bravura Solutions, these technical changes will have wide-ranging implications.
“Following the UK’s experience, financial advisers and investment platforms will need to demonstrate clear value to their fee-paying customers. While the implementation of RDR can feel like an obstacle, it is an opportunity. The unbundling and transparency of pricing under the RDR inevitably means more focus on platform charges and less tolerance for inefficiency throughout the value chain,” says Erasmus.
She says: “South African platforms will need to rapidly shift their business models away from accepting fund rebates to a clean, percentage fee to the end customer. This will involve the provision of clean share classes and unbundled pricing.”
The company’s recent whitepaper, Platform evolution through RDR and beyond: lessons from the UK experience, highlights key challenges that Linked Investment Service Providers (LISPs), or investment platforms for short, will face following the RDR. These challenges include:
Pressure on prices:
Platforms can expect intense price pressure from financial advisers, who will negotiate hard on behalf of clients. The opportunity is for strategic partnerships with deeper discounts offered to firms with a larger book of business with a firm. Discounts are also offered for larger accounts. For example, Aegon in the UK has a charge cap that is popular with financial advisers and helps them attract clients with larger portfolios.
Future regulatory change:
The RDR has been a major driver of change, however it was only one of several recent regulatory changes to impact the UK market. More regulatory change is always on the horizon and each brings its own non-negotiable, unavoidable functionality requirements to which platforms and their users must adapt.
Competition from new entrants:
To succeed in a competitive environment against the threat of new entrants, as well as the increasing demands of modern consumers, platform businesses must consider not only the ‘hard’ changes brought about by regulation and requiring additional technical solutions and tools, but also the softer elements of organisational change, needed to improve their systems, empower their employees, and drive a responsive, customer-centric culture.
Cyber security has become a top priority for financial advice businesses in every part of the world and platforms have responded by constantly boosting security protocols. UK platform providers are rapidly moving to implement new standards. Two-factor or multi-factor authentication will become the standard security protocol, however some platform providers are already introducing more advanced defences, such as biometric identification.
According to the research, this is a vital area in which platforms need to evolve to stay ahead of a growing threat. “If we are going to move forward into a post-RDR environment, success will depend on being more open and nimble. The ground is shifting beneath of feet, but there are many practical steps investment platforms can take to navigate changes, while still retaining competitive advantage.” says Erasmus.
Taking from the UK’s experience with RDR, Erasmus says the key to success for South Africa’s platforms is having the right technology architecture in place. “By deploying dedicated microservices such as capital gains tax calculators, ESG reporting, and customisable annual review meeting reports, platforms in the UK have been able to help advisers meet new regulatory demands as they arise and improve efficiency in how client service is delivered.”
In South Africa, Erasmus believes the RDR represents a clear opportunity for platforms to evolve to get the proposition right and to enable greater holistic planning services for their financial adviser clients.
Download the research to learn more: Platform evolution through the RDR and beyond: lessons from the UK experience.