Here is a riddle for you. Question, what’s even bigger than the total number of IFA clients? Answer: the total number of IFAs’ ex-customers. Oh and by the way, the use of the word “customer” is deliberate.
Jokes aside, one of the most staggering omissions of all the discussion about the consequences of the RDR is not so much the impact it might have on consumers’ future ability to access independent advice but the fact that, given the choice, so few are currently prepared to remain as clients of their IFAs today.
Which is why I find unconvincing the current opprobrium being heaped on Standard Life for its free iPad competition, asking those who hold one or more of its investments whether they still have a “live” IFA attending to their needs to say so.
I suspect that if it carried out its work properly, making not just an iPad available but simply calling every one of its customers and asking a few questions, Standard would unearth a massive number of orphans as opposed to continuing clients.
Let me be clear. By “client”, I do not mean someone you might once have sold an investment to 15 years ago but would not recognise if you bumped into them while doing the Christmas shopping in Tesco.
My definition implies a sustained and – eventually – long-term relationship between IFA and client, consisting of at least once-yearly financial reviews and appropriate decision-making based on advice given on more than one issue – and requiring more than a one-off product sale.
If you accept this definition even minimally, what is shocking is how relatively small the number of genuine clients is compared with the far bigger number of those who could be but are not.
Just to give an example, an entirely subjective one: almost half of my acquaintances, people I mix with socially or professionally, have come into contact with an IFA at some stage in their working lives or since giving up work.
That is not to say they necessarily then followed through initial contact or, if they did, it remained a one-off transaction – of which more later. And, to be sure, we are talking about a relatively middle-class bunch of people. But I suspect that, in similar circles, most people have either accessed an IFA or strongly considered doing so.
What has gone wrong? How can it be that millions of people have slipped so easily through the fingers of IFAs in the past 15 or 20 years? I believe the main reason is that for too long the relationship between IFAs and their clients has been directly transactional, as already referred to. In saying this, I am not necessarily blaming advisers for this.
Over the years, it has become all too common-place for consumers to approach advisers with a specific problem, which they assume is resolvable in isolation. For example, a mortgage decision or a pension that needs setting up. Once the issue is sorted, the client disappears – either until the next time or never to be seen again.
Yet advisers too need to accept that the relationship they entered into with their clients over many years has been highly dysfunctional too. Primarily, it has been predicated on a “solution” that involved product sales as the key way of proving one’s expertise. Moreover, the IFA was paid not so much for his overall talent and skill as a financial planner but for his or her broking abilities and product selection. And providers have then colluded in the peculiar shaping of this relationship by ensuring that it was the act of sale that was rewarded, as indeed they had to in order to boost their bottom line.
To cap it all, from an IFAs’ point of view, it barely matters if the transaction remains a single one and is not sticky – that is, it does not lead to further work with that client. That is because as long as the client stays with the product for a relatively limited period of a few years, commission clawback is relatively minimal.
Even more important, an IFA has the potential to earn increasingly vast amounts of money from all the people he or she sold to without lifting a finger ever again.
That is the beauty of trail – and it is hardly an accident that by far the most vociferous defence of trail comes from those who are disinclined to lift a finger to earn it.
To return to Standard Life’s attempts to identify customers who no longer deal with their adviser, what is wrong with its approach is not so much its attempt to cut trail payments to the IFA but its refusal to rebate the commission back to the client.
If Standard Life is not going to service the client, and I cannot for the life of me imagine how it could do that, then the company’s attempt to halt trail payments is not fair.
But the responsibility for this happening lies not with consumers, who stand to gain nothing, or with Standard Life alone but also with all those IFAs who allowed it to happen in the first place over the years.
Nic Cicutti can be contacted at firstname.lastname@example.org