Case 1:16-cv-01035-RDM Document 33-3 Filed 08/10/16 Page 1 of 153 CHALLENGE AND OPPORTUNITY THE IMPACT OF THE RDR ON THE UK’S MARKET FOR FINANCIAL ADVICE FOURTH DRAFT: JUNE 2013 ANDREW CLARE, STEVE THOMAS, OMAL WALGAMA, & CHRISTINA MAKRIS AR064563 Case 1:16-cv-01035-RDM Document 33-3 Filed 08/10/16 Page 2 of 153 CONTENTS Executive Summary 5 Introduction 6 7KHLPSDFWRI5'5RQWKHPDUNHWIRU½QDQFLDODGYLFH $UHEHQFKPDUNV½WIRUSXUSRVH" 1.2 The impact on adviser numbers 11 7KHUHHPHUJHQFHRIGLUHFWVDOHVIRUFHV 3ODWIRUPVLQDQ5'5ZRUOG 7KHUROHRIWKH,)$LQD5'5ZRUOG &RQFOXVLRQV 7KHLPSDFWRI5'5RQDGYLVRUEXVLQHVVPRGHOV ,QGHSHQGHQWY5HVWULFWHG 2.2 Fee Structure 20 &OLHQW6HJPHQWDWLRQ %XVLQHVV0RGHO5HDGLQHVV 2.5 Outsourcing 24 &RQFOXVLRQV 7KHLPSDFWRI5'5RQWKHYDOXHRIDGYLVRU\EXVLQHVVHV )LQGLQJYDOXHLQDQDGYLVRU\EXVLQHVV 9DOXDWLRQSULRUWR5'5 9DOXDWLRQLQD5'5ZRUOG 7KH5ROHRIFRQVROLGDWRUV 1HWZRUNV &RQFOXVLRQV $SSHQGL[7KHRQOLQHVXUYH\ 2 AR064564 Case 1:16-cv-01035-RDM Document 33-3 Filed 08/10/16 Page 3 of 153 The unintended consequences of the RDR initiative, accompanied by rapid change LQWHFKQRORJ\DQGVRFLDOPHGLDLVOLNHO\WRIXUWKHUH[WHQGWKH²DGYLFHJDS³OHDYLQJ DVLGHWKRVHZKRKDYHWRRIHZDVVHWVWRPHULWDWWHQWLRQIURPSURIHVVLRQDODGYLVHUV WKRXJKWKH\PD\ZHOOEHLQQHHGRI½QDQFLDODGYLFH7KLVFDQQRWEHDGHVLUDEOH RXWFRPH$QGVXUHO\ZDVQRWWKHLQWHQGHGOHJDF\RI5'5"%XWWKHJRRGQHZVLVWKDW WKHPDVVLYHVKDNHRXWLQWKHLQGXVWU\ZLOOFUHDWHRSSRUWXQLWLHVIRUWKHPRUHZHOO TXDOL½HGDQGVRSKLVWLFDWHGDGYLVHUVZKRFDQJHQXLQHO\DGGYDOXHZLWKWKHLUFOLHQW SURSRVLWLRQV°DQGWKH\ZLOOEHDLGHGE\WKHKXJHLQFUHDVHLQWUDQVSDUHQF\DIIRUGHG E\WKHHQGWRSODWIRUPUHEDWHVDQGWUDLOFRPPLVVLRQ7KH½WWHVWZLOOVXUYLYHDQGWKDW PXVWEHJRRGIRUVRPHWKLQJDVLPSRUWDQWDVORQJWHUPZHDOWKDFFXPXODWLRQ i. $GYLVRUQXPEHUVIHOOIURPDWWKHHQGRIWRE\WKHVWDUW RIZH½QGWKDWWKHUHPDLQLQJ)LQDQFLDO$GYLVHUVDUHXQGXO\RSWLPLVWLF DERXWWKHLURZQEXVLQHVVSURVSHFWVLQWKH5'5ZRUOG+RZHYHUZHEHOLHYHWKDW FKDQJHVLQWKHLQGXVWU\KDYHDVPXFKWRGRZLWKXQIROGLQJWHFKQRORJLFDODQG FRPSHWLWLYHIRUFHVDVZLWK5'5LWVHOILQGHHG5'5LVRQO\SDUWRIWKHVWRU\RI change. ii. :HEHOLHYHWKDWDGYLVHUVVXEVWDQWLDOO\XQGHUHVWLPDWHWKHWKUHDWIURP'& offerings, and are overoptimistic about future revenues from unchanging or VORZO\FKDQJLQJEXVLQHVVPRGHOVDQGOR\DOFXVWRPHUV iii. <HWDQLQFUHDVLQJO\½QDQFLDOO\OLWHUDWHULFKHUDQGFRPSXWHUVDYY\FOLHQWHOHZLOO RIIHUIHUWLOHRSSRUWXQLWLHVIRUWKRVHDGYLVHUVZKRFDQGHPRQVWUDWHPRUHULJRURXV DQGVRSKLVWLFDWHGSURSRVLWLRQVJRLQJIRUZDUG7KHVXUYLYLQJDGYLVHUVZKRULVH WRPHHWWKLVFKDOOHQJHDUHOLNHO\WREHKLJKO\TXDOL½HGDQGFDQH[SHFWDEXR\DQW demand for their services. iv. :H½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½JXUHVDUHIDUORZHUWKDQ the ‘required’ numbers indicated in our survey. This excessive optimism on future UHYHQXHVVXJJHVWVWKDWPDQ\PRUHDGYLVHUVZLOOKDYHWROHDYHWKHLQGXVWU\RU accept far reduced incomes. v. 2IFRXUVHWKHDERYHQXPEHUVGRQRWDFFRXQWHLWKHUIRUUHJLRQDOYDULDWLRQVLQ ZHDOWKRUIRUWKHIDFWWKDWWKHKHDGOLQH½JXUHRI GRHVQRWDOORZIRUWKH DWWUDFWLRQWR,)$VRIWKHJURZWKSRVVLELOLWLHVRIVPDOOHUSRWVRIZHDOWKRYHUWKH OLIHF\FOHRIWKHFOLHQW7KHFRQFHQWUDWLRQRILQYHVWLEOHDVVHWVLQ/RQGRQDQGWKH 6RXWK(DVWWRJHWKHUZLWKXQGRXEWHGSRFNHWVRIDI¾XHQFHQDWLRQDOO\WKHUHIRUH PDNHVJHQHUDOLVDWLRQVIUDXJKWZLWKGLI½FXOW\ AR0645653 Case 1:16-cv-01035-RDM Document 33-3 Filed 08/10/16 Page 4 of 153 vi. $GYLVHUVSRLQWWR5'5µVUDLVLQJRIPLQLPXPHGXFDWLRQOHYHOVWR4&)DVD major reason for the timing of the recent reduction in adviser numbers. 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