By Yoram Lustig.
The RDR introduces three main changes.
The first is that commission is replaced by adviser charging. Historically, the majority of advisers were paid commissions by investment product providers each time that they recommended one of their products. This raised a concern that advisers were incentivised to recommend products with the highest commission, not necessarily products most suitable for customers. Under RDR commissions are banned. Advisers need to disclose all the fees and charges to customers.
The second change is the categorisation of advisers. Historically advisers were classified as either:
- Independent, being supposed to look at the whole of the financial market before recommending products (these advisers are known as Independent Financial Advisers or IFAs);
- Multi-tied, being able select products from a list picked by their employer; and
- Tied, being able only to recommend products offered by their employer.
RDR changes these categories into:
- Independent (no change), but advisers will need to demonstrate that they consider a wide range of products, including ones that do not pay commissions, such as exchange traded funds (ETFs);
- Restricted (a combination of multi-tied and tied); and
- Simplified advice, the meaning of which is yet to be clarified.
The third change under RDR is the qualification of advisers. Previously advisers had to hold a certificate in financial planning to be qualified. Under the RDR the minimum qualification level is raised to the equivalent of a first year of a university degree course.
Multi-asset investing provides answers to all three changes:
- By managing the customer’s wealth in the form of a multi-asset portfolio, including dynamic asset allocation, advisers can justify the adviser charging.
- By applying a robust investment selection process and utilising the full spectrum of investment choices, advisers can fulfil the new requirements for being classified as independent.
- By learning the modern techniques of portfolio management, including theory and practice, advisers will be able to more easily meet the new qualification requirements.
Multi-asset investing is the solution to the RDR for advisers.
Yoram Lustig is the author of Multi-Asset Investing: A practical guide to modern portfolio management which is available to buy from Harriman House.