Top tips to becoming RDR-ready

The Personal Finance Society, in conjunction with David Shelton, author of The Business of Advice, outlines the measures advisers should take for their firms to be RDR ready.

At this point, business owners and managers need to step back and think: “What does my business look like now and what changes do I need to make to compete and take advantage of the RDR opportunity?”

So, what do businesses have to do and what pressures will that bring?

For many businesses it will be more about fine tuning than radical change. But for others, 30 months actually is not enough time. Old style businesses with no formal service definition, reliance on initial commissions and low capital holdings will struggle to be match-fit for the RDR.

So what will the new market, post-RDR, resemble? Firstly, it will be characterised by clarity and transparency of service and pricing. This will mean a re-education for some advisers for, instead of having conversations with providers about commission, they will be talking to clients about how much to charge for advice. This is a 180-degree shift in approach.

Also, the pattern of revenue in advisory businesses will change, with more coming directly from clients and an increasing proportion as recurring income. These changes to the income mix as well as the transition are likely to create an initial dip in headline turnover coming into the business.

The RDR world will require a consistent level of service to be delivered by all advisers, and firms will have to be absolutely confident they have the discipline to deliver it.

And this will need to be backed by highly efficient IT and back office functions which, after 2012, should mean the creation of more streamlined, efficient and cost-effective firms.

Figures suggest that about 11% of advisers will leave the market pre-2012, which accounts for 8% of businesses operating. Of those choosing to remain, an estimated 10% will not make it work, finding the new model a step too far. What this will leave is a consolidated market with the remaining firms in a good position supported by a high and rising demand for advice.
So, the effort to make the change will be worth it, but where does a firm begin?

Self audit

Initially, a self-audit should focus on a range of priority issues including service, pricing, client segmentation, financials, recurring income and capital, processes and IT and, finally, clarity of strategic direction.

When reviewing the service offering, a firm needs to decide on whether to provide a tiered or bespoke system. In practice, this might mean providing a top tier service for companies and wealthy personal investors with a second tier for those with more modest means. Then decide on the materials and communications each will receive, which may comprise investment reports, newsletters and a certain frequency of valuations. Contact time could be several times a year for top clients with annual or less frequent interaction for the lower tier.

Sorting out the pricing of services needs a clear and structured approach. A lot of firms, even now, can be quite hazy on how much their services should cost. For example how should a valuation or visit be priced? What about pricing a review that makes the firm money while having a satisfied client? Even when undertaking a crude cost analysis, IFAs tend to be surprised how much they should be charging.

As the pattern of income is going to change the clarity on cost of delivery is very important. In the past, income streams cross-subsidised and covered loss making clients. Post-RDR, everything a firm does will have to make a profit.

Marketing plans

How does this imperative affect a firm’s marketing plan? For many firms almost nothing will need to change. However, they will be strongly advised to promote the benefits of their service proposition above all else and demonstrate clearly what consumers will get for their money.

While, traditionally, IFA clients do not tend to be promiscuous, the new world could bring much more shopping around.

So, if your communications on and offline are based on technical information, it is time to ditch them and start again. Your marketing communications approach should recognise the RDR has created the move from a product to a service sale.

For example, having a service brochure – laid down clearly – will help your conversation with the customer and illustrate the level of work that is being undertaken on their behalf behind the scenes.

Back office services

But no amount of marketing will count if the back office functions are not up to scratch. When firms are considering how to redesign their services, there are two fundamentals affecting the back office: first, are all of your processes and IT geared up to deliver this? For example, will you be able, logistically, to provide valuations every six months as part of your service promise? It is a huge job to achieve, but that does not make it impossible if the systems are in place

Second, have you got the right people in the right jobs?

Some firms will need to work very hard with their advisers because a lot of the RDR changes go to the heart of what the adviser does. If they have worked in a particular way for a number of years that could well have to change, moving from having a degree of autonomy to new demands for conformity; that will be quite a shift for many. Of course, it will depend on the personalities within the adviser team and the latitude they have been given previously.

From a resourcing perspective, firms may find that their advisers are too stretched servicing the needs of the top tier clients. So, paraplanners may be needed to complement the work the advisers do. That additional resource may already exist but, then again, they might need recruiting.

When it comes to customer service, the back office staff generally tend to be customer and client oriented and most people in those roles will embrace the RDR wholeheartedly.

For business owners and managers, managing the change of the RDR means handling a lot of moving parts within an increasingly tight deadline.

To do this, it is important to identify and concentrate on the priorities, allocating time to manage the projects alongside business as usual activity and laying down a comprehensive implementation plan.

Small IFA businesses need to understand the practicalities of managing the change successfully. It does not matter if some of the elements involved take a couple of years, as long as they are successfully completed.

What works in the favour of firms in the advisory sector is that they tend to be relatively straightforward businesses with small numbers of staff. The challenge comes from having to face such a significant change over such a short time period, presenting one of the biggest management challenges they will ever face.

The PFS is staging RDR Business Transition Workshops across 3.5 days in London, Leeds, Bristol and Edinburgh between September and December 2010.
For more information visit www.thepfs.org