The UK's Retail Distribution Review could be a good thing for independent financial advisors and customers alike, as it creates downward pressure on asset managers’ fees and allows IFAs to capture a greater part of the financial services value chain, says UK-based asset management firm TCF Fund Managers.

The RDR, being implemented by the Financial Services Authority, the UK regulatory body, is a process designed to improve the quality and professionalism of financial advice. The RDR has been criticised in some quarters for adding to the already-growing burden of financial regulation.

However, some figures in the investment industry see the RDR as a positive force in driving out what are considered to be poor practices. David Norman, director of TCF, said that by taking the IFA’s commission out of the price of an investment product the RDR has broken a fundamental link in the value chain. As IFAs gain the freedom to negotiate their fees, there is a bigger incentive for asset managers to price their products competitively so that IFAs can take a bigger share; this will also incentivise IFAs to seek out cheaper products, he told WealthBriefing recently.

IFAs in the UK control the bulk of new fund distribution and are the ones who build significant asset pools for managers, as well as adding considerable value through asset allocation planning and client relationships, and they will want to own more of the value created by these assets, says TCF Fund Managers.

Meanwhile, the standardisation of funds through the UCITs model makes it easier for large advisors or networks to establish their own investment vehicles, says the firm.

“Asset managers bizarrely seem to be one of the worst run industries you can imagine”, said Mr Norman, “we estimate that assets under management grew by some 50 per cent in ten years to the end of 2008, and yet over the same period costs rose as a percentage of these assets by almost a third - what sort of economy of scale is that?”

“Asset managers can cut their costs. Partly because there are an awful lot of asset managers in the UK, and also because of the growth in passive investing,” Mr Norman said.

Transparency will also drive change, as advisors will insist on the same level of transparency from providers that they are being forced into by the RDR; investors will see the real annual cost of a product, as opposed to the total expense ratio.

“A rational investor would now seriously challenge the supposed key benefit of pooling and be appalled that annual total fund and advice costs are often close to 4 per cent per annum – for what is the fairly simple task of investing their savings in the market,” said Mr Norman.

According to the asset management company, these changes will provide opportunities for well qualified advisors and low cost product providers, as well as select alpha managers that can really deliver cost effective outperformance.