RDR fees still not clear for clients, experts warn

Clients still in the dark about RDR fees despite January 1 deadline passing

Fee structures under the UK Retail Distribution Review (RDR) have still not been explained properly to clients, despite its becoming law on January 1, experts warn. Any institution offering financial advice is expected to have informed customers how fee structures are changing under RDR – namely that they will now have to pay for financial advice. But experts warn that only a minority of financial advisers have put out the relevant material.

"The Association of British Insurers and the Financial Services Authority have published RDR information but it seems only a small percentage of advisers have issued anything," explains Malcolm Kerr, a London-based executive director in Ernst & Young's financial services division. "Banks and other advisers must ensure they explain services and fees to potential and existing clients at the earliest opportunity using a ‘key facts' document or equivalent."

Under RDR, financial advisers have to charge clients for their advice. They can no longer work on commission payments from product providers. But Kerr argues that many advisers are still behind when it comes to developing such propositions, in spite of the January 1 deadline passing. "We suspect that maybe 50% of advisers have not developed and documented clear and compelling fee-based advice propositions," he says.

Steve Martin, a Leicester-based business analyst at software provider Dion Global, says that some sectors are better prepared than others. "While the independent financial advice community has been busy preparing for the rule changes for a number of years, other institutions are still working out exactly how they will be affected and what preparations need to be made."

He says that progress has been made but there is still work to do. One of the biggest communication challenges will be justifying new direct fees for services that previously appeared to be free to clients, he explains. This will be particularly challenging when it comes to renewals or repeat advice, he adds.

Kerr agrees that this will be a significant challenge for institutions. "In the short term, life will be confusing for consumers who will be asked to pay for something they thought was free," he says. "And it will be challenging for many advisers to sell advice rather than products."

He also warns that we can expect to see more redundancies in the advisory sector over the next 12 months as institutions face up to the impact of RDR. "RDR will create more transparency, which will put pressure on all the costs in the value chain. Institutions will continue to react to this by improving efficiency, so I think we can anticipate continuing redundancies across the piece," he says. "We see advisory staff numbers reducing in 2013 – primarily in intermediary firms rather than institutions."