Lessons to be learnt
Wealth managers have been grappling with the RDR far longer than corporate advisers. John Lappin asks what lessons can be learnt from the individual market
The group variously known as wealth managers, IFAs and financial planners has been confronting the challenges of the Retail Distribution Review since 2006. But the corporate sector was only brought within scope in 2009. As the RDR deadline approaches at the end of 2012, are corporate advisers less prepared to meet its demands? And is there anything the individual and group markets can learn from each other as they adapt their respective models?
One provider, Scottish Life, has assembled a team to research the corporate advice market, to help inform its post-RDR model, even though it has already had a group financial adviser fee up and running for the last 18 months.
Sales director Jim Smith says they have talked to around 300 RIs in the corporate market across different types of IFA, by which he means below the level of the top five consultancies. After carrying out this research he believes many are not that far down the road towards changing model, although adds that dealing with the recession has made a switch away from commission in the run-up to RDR less palatable.
He says: “The difficulty is that pre-RDR you have had all sorts of models and they are not going in the direction you would expect them to. You have an overlay of recession leaving employers less willing to pay fees over the last couple of years. Organisations may like to drive things in certain ways, but they are restricted by the market and by a fear of competitors.”
Smith says intellectually most advisers accept the need to move to a financial adviser fee-style model, which already allows commission to be taken from pension contributions in the early years of the contract, but a classic reply he gets is ’I have to be aware of other advisers who may not be starting that journey and if I appear to be costing money to the client, the client will go with the other contract.’
He also believes there is a lot of pressure from parent firms to maximise income which also counts against change. But he has also detects confusion, with some still saying the RDR may not affect them - that the FSA may change its mind. This is in contrast to the individual wealth management sector, where IFAs have been coming to terms with the RDR for years.
“If you are a corporate guy, the RDR didn’t capture GPPs until late in the process, so a lot of practical things haven’t been thought through. For example, consultancy charging isn’t the same as adviser charging in its customer impact.”
Smith says it is not just confusion with the RDR specifically. Some fail to remember that with phasing, most auto-enrolment will occur in a post-RDR deadline, post-commission world.
He believes that perhaps as few as 30 firms have a well-defined strategy.
One of those may be Bluefin Group which has made a very clear strategic choice to separate its individual and group business. The firm provides both corporate and wealth management services but no regulated advice is offered on its corporate side.
Patrick Murphy, practice head at Bluefin Wealth Management, says: “We are effectively only dealing with corporate entities as clients and not actually dealing with employees as individual clients. About a year and a half ago, all of the employees who were registered with the FSA were deregistered. Corporate consulting don’t give any corporate advice to individuals and that will continue, so any regulated advice gets referred to wealth management and we give them regulated advice. For the corporate side, it will be a very limited impact in terms of RDR.”
Separating individual and group business will not solve all problems - making consultancy charging work for those employers reluctant to pay a fee will remain a challenge - but it does remove one level of complexity. For firms built on a model where all employees are given individual advice, on the other hand, the RDR presents serious difficulties.
But despite this, not all adviser firms with a planning and a corporate division want to abandon advice including face-to-face advice in the corporate arm.
Neil Welbury, managing director of 80Twenty Consultancy says: “There are all sorts of ways of communicating with people but the best way for the last two to three thousand years is to sit down with them and explain. Our strap line is ’we advise’. At every single contact point, when employees enter the scheme, change contributions, when they retire, we want to make sure they have interaction with a qualified individual. If you write a scheme at 0.65 per cent or 0.75 per cent, we know those rates are good, we know employees are happy. I can’t say that I’m not concerned. But the sad thing is we don’t want to dilute our model. We are proud of it. Under the RDR, we are not concerned about schemes that are set up already but we might have to tweak the model for new schemes.”
Kim North, managing director of consultancy Technology and Technical, believes the corporate advisers have a much greater cushion than individual wealth management IFAs when it comes to the RDR crunch.
If you are a corporate guy, the RDR didn’t capture GPPs until late in the process, so a lot of practical things haven’t been thought through
“With the majority of products, group life assurance, group PHI, PMI, critical illness you are less sensitive to the new RDR charging basis,” she says.
“The charging basis is charging the employer per employee but because that still comes with commission, there is a lot the employee benefits firms are going to gain from RDR.”
She believes pensions provide a very different challenge however. “When it is purely pensions, they face the full ramifications of charging changes and disclosure right up front.”
But she says the full challenge may not be fully appreciated yet. She points out that wealth managers have been criticised by the FSA for all sorts of aspects of their advice but corporate advisers will have to pay heed to these warnings too.
She says: “On risk assessment, proper outlook and proper suitability of funds, I think those who are focusing on pensions will have to follow the procedures of wealth managers - with the appropriateness of the product - with suitability of risk.”
Welbury agrees about that. He says: “On the wealth management side, the risk levels and justifying the fund selection is gaining momentum. Lots of those processes will work their way into GPPs and shoving people in default funds will not do, but where you would want to sit down with the individual and do it on an individual basis, the costs moving forward mean it will have to be more of an automated process rather than an advice process. That is sad.”
Syndaxi Chartered Financial Planning principal Robert Reid, who also runs transition consultancy the Ideas Lab, says corporate advisers think they are under less pressure but he is not so sure. “It is true to say that because commission is on-going for existing plans, a lot of corporate advisers don’t think they need to make changes to model. There seems to be a tremendous reliance on this,” he says.
“But I think a lot of the insurers may say ’look we’ve paid commission up to now, but we are not going to do it anymore’. Transition isn’t restricted to financial planning and corporate firms need to get their act together too.” he adds.
Smith adds: “From a legal point of view, yes, commission continues, but from a commercial point of view, what size of charges will you be putting people in and how will that compare with the new market? Legally commission continues yes, but whether that will be value for money is a different consideration. Whether the companies will pay that rate in a world where they don’t have to, is a separate question.”
Reid says it is unfortunate that the concept of ’free advice’ has increasingly spread from IFAs to corporate consultants. “One of things corporates have copied from the personal financial planning side is one of its worst traits - this free advice thing. Whereas years ago all consultants would have charged for the advice, now free advice is being bandied about.”
He also sees problems with the big consultancies offering level commission. “I think the big consultancies made the mistake of going into level commission, because that moves towards no service, no commission. That isn’t the model clients bought into, but it is the model they end up with. They may say if there is no service, I’ll not pay you anything.”
However Reid feels some more important lessons can be learned by corporate advisers. “There is a great benefit from unbundling your charges, in letting the client know what you are doing, because I don’t think there is any appreciation of it. You have got to get across the message to say ’there is a lot involved in what we are doing’,” Reid says.
However Smith says firms have not reached that destination. He says: “We have been asking them have you analysed what you do for clients and what the clients then value and have you asked the clients what they would pay. Some have done the first two, I haven’t seen one yet that has done a robust piece of analysis on the last one. They don’t like talking about the fact ’I cost money’.”
With social media and flexible benefits, with people talking to each other, you can start putting in financial planning tools, like cash flow modelling
Besides costs are there any techniques corporate advisers could learn from planners. And is it possible to bring full service financial planning to the masses?
The chief executive of the Institute of Financial Planning, Nick Cann, believes it can be done, but there are obstacles - cost being the main one.
He says: “There is a top end that is everyone’s nirvana, and you can provide full financial planning. Most people will say it is very difficult to provide that profitably unless people have some assets. If you take that down to the mass affluent, it is going to be unprofitable, unless you can apply technology solutions in a very refined way. It is going to be about delivering advice around product solutions.”
Cann believes part of the answer lies with the use of social media. “The opportunity comes around auto-enrolment with flexible benefits and social media attached. Even the payment of fees for advice, if you say we will provide you financial planning for one to two grand a year, people are going to say no. But if you were to use all sorts of systems and say if you were to pay between one and two per cent of your annual income to receive advice would that be ok? You may find the mechanics to start delivering something.
“With social media and flexible benefits, with people talking to each other, you can start putting in financial planning tools, like cash flow modelling. You can start taking some of the principles of financial planning and using social media to get people doing some financial planning of their own, en route to being able to take advice. The blocks are there to do that.”
Cann says that some firms are not only delivering financial planning to executives but also looking to commoditise it, to offer it in their benefits arms. “They see the potential of delivering financial planning to the executives, but also to offer more basic planning to the employees. In principle it has to be a sensible way of doing business. It is a question of how you commoditise it and make it pay.”
Bluefin applies some of that thinking in its own business. Murphy says there is a huge information need still to be satisfied for employees and the financial planning arm is influencing the content.
He says: “The average person is not going to be able or afford to pay the fees a qualified financial planner would charge, so we are doing a lot of work with our corporate team to talk about how we deliver information and knowledge to employees of our employer clients without it being advice - involving decision trees, use of platforms, technology to deliver videos. It is all really about asking ’how does the average person seek financial information though it may not be regulated advice.”
Welbury says lessons from one side can be applied in the other. But he thinks costs from corporate pensions are actually showing up what a bad deal some wealth management can be.
His firm charges 0.5 per cent on the wealth management side. But he contrasts the fact you may be getting some face to face advice with employees on the corporate side for say 0.65 per cent, whereas on the individual planning side, a 1 per cent advice fee, plus platform charge plus fund management costs could come to 2 per cent.
“You can charge 1 per cent for a truly bespoke process, but when you are sticking people into three portfolios - that is not wealth management. It is just herding the right cattle into the right place.”
Another transition consultant thinks that there are broader lessons. FP Advance chief executive Brett Davidson says: “The really good businesses are focused on creating a magnificent client experience. You look at something like Apple, using their stuff and I think that is what top IFAs in personal financial planners are now focused on, they have been good technically, but now they are thinking how do I make this a fun and enjoyable experience which are two words you don’t often hear when people are sorting out their finances. That is not specific to retail IFAs. You can apply that to any sort of financial consultant.”