Newsflash! The British have staged a revolution. A financial revolution, that is, called “Retail Distribution Review (RDR).” Haven’t heard of it yet? RDR debuted in the U.K. on December 31, 2012, but I’ve seen precious little coverage of it here in the U.S. In this uprising – a full, frontal attack on hidden fees and conflicted financial advice – I’m cheering on the Brits.
What’s Going On
In the years surrounding the new millennium, the U.K. empowered its newly formed Financial Services Authority (FSA) to implement the Financial Services and Markets Act 2000. FSA’s four-pronged mission: to improve market confidence, financial stability and consumer protection, and reduce financial crime. To these ends, the FSA undertook a review of the financial industry in 2006.
So far so good. But how often have we seen government agencies study … and study and study? This time, the FSA has something to show for it. That “something” is the RDR, and it’s taking on some of the financial industry’s most sacred cows.
What, No Commissions?! For starters, an ambitious and core component of RDR is banning commissioned advice and replacing it with fee-only advice. As described on the FSA’s site: “Advisory firms must explicitly disclose and separately charge clients for their services.” Imagine, advisor commissions, on the chopping block. Radical stuff.
Shirts vs. Skins. Another nice feature of the RDR: In no uncertain terms, advisors must now declare whose team they’re on. Are they “independent” or “restricted”? This clearly informs consumers whether their advisor is free to offer any investment product or only limited selections.
No More “Advisors” Who Aren’t. RDR also applies “to all advisers in the retail investment market, regardless of the type of firm they work for (banks, product providers, independent financial advisers, wealth managers, stockbrokers).” And it requires “individual advisers to adhere to consistent professional standards, including a code of ethics.”[1] Sweet. I can’t help but compare that to all the resistance we’re facing here to the no-brainer concept that anyone dispensing investment advice in any guise should be held to the full standards of a wholly fiduciary advisor.
Exploring More With SensibleInvesting.tv
To explore more of the details of the RDR as well as remain current with its progress, I recommend keeping an eye on a website established by an inspiring group of passively minded advisor allies over on the other side of the pond: www.sensibleinvesting.tv.
The site is hosted by the U.K. wealth management firm Barnett Ravenscroft Wealth Management (BRWM), but it’s a egalitarian effort, intent on serving as a mouthpiece for the global passively minded community. There, you’ll find some fantastic videos about the RDR (which was how I was first alerted to this news myself). It’s also got other handy resources for you and your investor clients, including shareable videos about passive investing featuring some of the most familiar names in our world: Bogle, Fama, French, William Bernstein, Dimensional representatives and many others.
According to BRWM’s managing director Richard Wood, the idea for the site came when the firm was making is documentary, Passive Investing: The Evidence. “We looked around at what information was readily available about passive investing in the UK and realised there was a much bigger job to do than making one film,” he said. “The idea for an internet video channel devoted to information about passive investing came to us in response to the dearth of independent comment available on the web.”
RDR Gotchas
As covered in more depth at SensibleInvesting.TV, there’s a great deal more to understand about the RDR and the usual loopholes that may thwart its success. For example:
No fee limits? Fees may now be more fully and understandably disclosed, but that still doesn’t stop a firm from charging excessive fees. Investment expenses are generally higher in the U.K. than in the U.S. As much as those of us who are mindful of high costs bemoan our minority status here, we have made slow but important headway in driving costs downward during the past decades – for investment vehicles and, yes, for advisor fees too.
Combatting the Status Quo? As described in “RDR, A Guide for Investors, Part One,” relationships between the manufacturers and distributors of investment vehicles have gotten cozy, with 1–8% commissions for initial sale, plus a potential “trail” or “renewal” commission of 0.5% per annum, supposedly to cover the costs of ongoing advice. Although commissions are now banned moving forward, existing “trail” commissions are exempt. And just because the commissions may be going away, the relationships might not; even an “independent” advisor’s investment recommendations may not be quite so completely independent as they should be. Connecting the dots, it seems to me that there are some strong existing interests that are unlikely to surrender without a spirited fight. Which brings me to my next concern …
Marketing as Usual? A U.K. advisor must now disclose a great deal more information than before RDR, but the truth is, any semi-competent marketing department with ample budget will probably be able to spin its offerings to still seem more appealing than warranted to many investors. I know how this works, because I am a marketing professional too. Personally, I try to use these powers as a force for good, but I know how easy it is to couch high-cost as “premium service” and restricted products as an “exclusive offering” – and how compelling this messaging can be. Investors who are content with the status quo (whether or not they should be), may or may not see the rip-off for the breeze.
What’s Next?
Will the U.K.’s financial community embrace the letter and the spirit of the RDR’s universal code of ethics? I believe some hurdles and set-backs are inherent to the dramatic financial revolution that the RDR is clearly seeking to foment. After all, so many of us around the globe have been campaigning so long for these sorts of financial industry improvements; if they were easy to do, we’d already have done them.
But being a glass-half-full sort of gal, I have high hopes. To quote motivational speaker Jim Rohn, “We generally change ourselves for one of two reasons: inspiration or desperation.” In the case of RDR, change may result through plenty of both. Regardless of the outcome, we here in the U.S. would do well to watch, admire and consider emulating the inspirational RDR.