Nick Rucker, a lawyer at Berkeley Law, the wealth advisory law firm which the larger law firm of Irwin Mitchell acquired a year ago, looks at the unintended effects of the UK's Retail Distribution Review two years on.

Readers might recall Simon Ellis' comprehensive evaluation of the changes that the RDR, the greatest shake-up of the advice market in modern times, made to the structure of the investment management 'universe' in the United Kingdom. The structure of the market before fund firms had to stop paying commission to advisors is seen in diagram 1 and the 'after' picture is in diagram 2.

Berkeley Law deals with all of the types of entity on the diagrams to a lesser or greater degree. Everybody in the supply chain is under quite a lot of scrutiny nowadays in terms of performance and fees and many firms all over the diagram are having their margins throttled as the consequences of the RDR continue to unfold. This is perfectly sensible, but in a way it could be argued that the 'throttling' process is happening for the wrong reasons. It is really related to other people entering the market and to performance. If a wealth-manager can demonstrate great performance, he (or it) can, theoretically, increase his charges. If his performance is more ordinary, he will have to charge less and because of regulatory costs his margins are going to thin down. In reality, of course, no-one can 'out-perform' indefinitely and even if one manager could, he would eventually negate his performance by charging more and more for the privilege, making it irrelevant. In other words, the industry cannot compete endlessly on the basis of a few firms demonstrating 'out-performance' while margins thin. In the long run, that is not sustainable. What is sustainable, however, is competition based on something that is client-focused (not just self-conscious competition between managers) such as service. Clients will, irrespective of 'out-performance,' pay for service.

An obsession with basis-points

As anybody who plans the wealth of another person (be it an accountant, a lawyer or a wealth-planner) would say, the main job is NOT to hunt for the discretionary fund manager (DFM) or platform that charges the least in terms of basis-points. Cost is obviously an important consideration that one ignores at one’s peril but it should not be the only or even the primary one. For long-term planning, the real job is to obtain the best products, services and advice to fulfil a fully informed plan for the client. If that is achieved, cost (just like performance – and certainly 'out-performance' of whatever benchmark is chosen) is utterly irrelevant. In other words, the job of tailoring the right mixture of products and services to the client is a much bigger job that worrying about cost.

In the long run, the person who is going to win is the person who says: "I'm not too worried about being at the top of this quartile this month in my performance and proving that I have tighter margins than everybody else. I might cost a bit more but you know that I understand you as a client and I'm looking after what you need to do." This is one of the problems that I have with the wealth management industry: 90% of it is totally inward-looking and obsessed with proving to its peers that it is competitive with them and is less concerned with the people who are buying its products and services.

Why HNWs require help

I believe that the RDR did a good job of increasing awareness of costs, performance (and what it means in reality for each client) and perhaps making people think a bit more about what they pay money managers for. In theory, it helps people make better choices. In reality, however, the vast majority of HNW people (indeed people in general) are not qualified to make these choices, irrespective of the RDR; there would be no wealth-planning industry if they were. In that sense, it does not matter how efficient the wealth industry becomes; the client still needs someone to ask him what he needs and turn that into a bespoke plan. Wealth management will always be a huge industry because of this.

In all honesty, the vast majority of high-net-worth people (and this probably goes for all of us) are bored by the process of looking after their wealth and have little interest in the protagonists, investments, opportunities or pitfalls in financial services – and even if they did, they would scarcely be well-equipped to understand them. Frankly, why should they? Ordinary people do not buy new cars and give them exhaustive safety checks to make sure that they are 'fit for purpose' before they drive them off the forecourt. Many very wealthy people I have met are actually not particularly interested in the money they have; they are interested in making money and of course they want to keep it, but they are not very interested in how somebody else looks after it for them. I have always found this fact rather odd.

Recidivism by other means

The New World Model [diagram 2] I think is great, because it has, arguably, made the wealth management industry more competitive and has also ensured that the typical client is insulated by a couple of groups that provide him with (potentially) more protection when interacting with everything else on the diagram.

At the moment, however, a lot of the people on the left of the diagram control a lot of the things on the right, so the situation is coming to resemble diagram 1 again but by other means. As far as I can see, a lot of the life companies (to take the most obvious example) are now running around trying to buy up wealth-planning businesses. That suggests to me that they are, to put not too fine a point on it, doing so to protect the assets they hold and thereby their annuity income. If they control the people who are advising clients to use various products and services, those clients will always somehow end up in their funds and wrappers and on their platforms. The process is becoming, and indeed has already become, alarmingly self-referential.

When some very big companies buy up all the people who are advising, what will be the outcome? I assume that all the people who have small, quirky funds or interesting investment management houses or different models that are not connected to the big life companies will eventually be unable to compete unless they offer something the big players cannot.

There are no rules to halt this process. Where managers of money are buying up advisors, such as wealth planning businesses, they are doing what we were originally worried about by another method.

Quite apart from everything else, the set-up that is emerging today is always going to make people wonder whether any advisor or distribution group that is owned by these firms is really independent. If it is owned by somebody who has something to sell, the discerning customer will always think to himself that the advice will lead inevitably to a conflict of interest. When the RDR happened, the people on the left of diagram 2 realised that the game was up, so it seems that they are now desperately trying to control the people on the right and hope that the customers won’t notice.

There is a rush now to aggregate IFAs and wealth-planners by St James' Place, Towry and Chase de Vere. In fairness, this is not a binary argument and there are many perfectly admirable reasons for them to do so: a takeover can provide the entities in the group with a standard back office; it can lead to cost efficiency; there will be synergies from having lots of people working in one place in terms of marketing, processes and legal and regulatory support. There is a truly beneficial side to this process, so it is not solely an attempt to control both sides of the conversation. Arguably, however, these models are also herding people into situations where they have to use their advice, their funds and their tax wrappers at the very least. Diagram 2 seems to represent an independent model but the ownership structure is trying to force people to buy things. That concerns me.

How the RDR can fail offshore clients

Berkeley Law has a lot of international clients. The decision to put them on a common or garden platform in the UK, which might be absolutely perfect for someone like me (I am 'res and dom') could be disastrous for them simply in terms of tax inefficiency (irrespective of any performance benefits they might enjoy). A res non-dom, being taxed on the remittance basis of taxation, might need a completely different type of platform, a completely different type of offshore nominee, that not only would not do anything to vitiate their tax status but also was set up to hold specific types of assets and keep everything offshore.

What happens if, whilst searching for bespoke advice, they are wrongly advised (either negligently or mischievously) to use the wrong type of platform by a business that wants their assets more than it cares about whether it has conducted a proper 'suitability' exercise or has the wherewithal to advise a client of that complexity? In many cases, it will cost the client a fortune to get out and the tax issues will be catastrophic. As I understand it, quite a lot of the aggregators who are buying up a lot of independent financial adviors (IFAs) now are doing this to disincentivise people from leaving. The client can be attracted in by a lot of good marketing, a lot of cost efficiency and a feeling that this is a very good model, but woe betide him if he says "this is not right for me" after two years and wants to get out. I would challenge anyone to claim that the majority of clients understand this when they are getting involved – they don't.

Enough's enough!

Lots of firms such as SJP and Towry sell advice, platforms, funds, wrappers and even discretionary fund management in a one-stop-shop. They are adding on more and more and more, which is what successful businesses do. In my view, however, the best businesses say "enough's enough" or "we could sell them that, but we're not going to because it vitiates our business model; we could make much more profit here but we're not going to because it's bad for the clients in the long run." If your firm acts ethically your clients will be happy, your staff will have a clear set of tenets to function by and you will forever be relevant, whatever your cost or performance profile looks like.

* Nick Rucker specialises in international structuring for ultra-high net worth individuals, families, trusts and structures, dynastic planning, succession and asset protection structuring. He can be reached on +44 (0)207 399 0931 or at nickrucker@berkeley-law.com