Senate Group Presentation: The Impact of RDR

1. THE IMPACT OF RDR
March 2015
Hamilton van Breda: Head of Retail Sales

2. 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. 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. 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. 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. 6
The FSA’s new advice landscape:
• Independent advice
• Restricted advice
• Basic advice
• Non-advised services
ADVICE CATEGORIES

7. 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. 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. 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
Coutts (3 year holding period) 310
Coutts (6 year holding period) 293
Coutts (20 year holding period) 282
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
St James Place Advisory (3 year holding period) 310
St James Place Advisory (6 year holding period) 216
St James Place Advisory (20 year holding period) 194
Towry (1 year holding period) 420
Towry (3 year holding period) 300
Towry (6 year holding period) 270
Towry (20 year holding period) 249

10. 10
• 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

11. 11
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. 12
THE IMPACT OF RDR
The UK adviser has far less time for clients
Source: Coredata research
UK adviser average time splits compared to the international average

13. 13
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

14. 14
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

15. 15
• 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

16. 16
CATEGORISATION OF ADVISOR
Source: Masthead
Relationship/Status
Freedomfromcontrol
(lackofinfluence)
Independent
Tied
Choice
Multi-tied
Financial Planner
(process not product)

17. 17
CHANGES TO THE SERVICING MODEL
Agency & Banks
IFAs
Mass
Market
Middle
Market
HNW
Lack of
proper
servicing
Wealth
Managers
INVESTMENTMARKET

18. 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
Source: Coredata research
Challenges facing SA advisors by impending RDR:
1. Changes in remuneration
2. Classification of advice between independent, multi-tied and
tied

19. 19
THE FUTURE OF DISTRIBUTION IN SA
Agents/Banks
Corporate
Independent
Tied
Multi-Tied
Independent

20. 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

21. 21
COREDATA RESEARCH
When do you think the Retail Distribution Review (RDR) will be implemented? (All)
Source: Coredata research

22. 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?
Source: Coredata research

23. 23
• 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

24. 24
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. 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

26. 26
• 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

27. 27
THE FUTURE OF FAIS?

28. 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