Beginning next year, the U.K. retail-investment industry will undergo a massive regulatory change that is expected to drive a sizable chunk of traditional commission providers out of business and force professionals to upgrade their skills.
While the upheaval poses challenges for some providers, the U.S. firms
Raymond James Financial Inc. and Pershing LLC see opportunities as the U.K. market shifts to an independent, fee-based model with open-architecture platforms.
The new regulatory scheme in the U.K., called the retail-distribution review (RDR), takes effect Dec. 31. Under the regime, advisers must make clear to clients whether or not they offer independent planning advice or are limited to proprietary products. Investors will choose whether to pay upfront commissions or asset-based fees. Commissions or trails paid by product sponsors directly to advisers — long a staple of the U.K. market — will be banned.
The changes are forcing U.K. advisers to go independent and make the transition from sales to advice.
“It's a positive for us,” said Cynthia Poole, director of relationship management for
Raymond James Investment Services Ltd. in London. RJIS has been recruiting independent U.K. advisers since 2001 and now has £2.97 billion ($4.78 billion) in client assets.
“We see some of those [U.K. advisers] spinning off and becoming their own [firms], and moving away from the commission model,” said Frank LaSalla, managing director at Pershing, who's responsible for the firm's foreign operations.
The firm's U.K. unit, Pershing Ltd., provides fully disclosed clearing as well as the Pershing Advisor Solutions brand to target larger U.K. advisers, typically money managers or aggregators.
The U.K. market traditionally has been more segmented than in the U.S., with advice provided through a mix of insurance companies, fund managers, banks, independent financial advisers known as IFAs and higher-end stockbrokers and investment managers.
But questions remain about whether U.K. investors will be willing to pay once they see fees and whether advisers stuck in the traditional commission model will be able to adapt and offer an attractive value proposition.
And like in the U.S., regulatory costs are a huge issue.
“The industry remains concerned about the cost of regulation, which is skyrocketing,” Ms. Poole said.
Around 28,000 advisers are offering retail advice in the U.K., according to the London office of Ernst & Young LLP. But the consulting firm predicts that the number of advisers will fall to about 20,000 by the start of 2014 due to an inability, or unwillingness, to adapt to the new regulatory climate.
