Linking-up with the problem solvers
In assessing his RDR position, Kevin Cannon, director of MGP (Employee Benefits) felt that five key questions needed answering
We are a largely corporate practice focusing on companies with five to 10 employees to those with around 500. We are independent, have just one branch, so we make all the decisions.
We have done a good deal of thinking around our RDR position and felt we had to answer five main questions:
- Do we wish to remain a directly regulated business?
- Do we qualify as “independent” in a post-RDR scenario?
- What is happening to other IFAs, particularly at the smaller end of the scale?
- Can we afford to be independent?
- Can we make a profit in the new environment?
On the first question, we unequivocally want to remain a directly regulated business. Why would we want to have only one or two options when there are 100 or more on the market?
To ensure that we would qualify as independent, we had to review various aspects of our business, including qualification levels, fee options, our process, capital adequacy and compliance.
We had to assume that the final qualification would be set at diploma level and, with that in mind, we conducted a full review of everyone’s qualifications. We contacted the CII to check on everyone’s status.
Of our four consultants, some were short. We have always encouraged study but have put a formal programme in place, including giving them time to study in work hours. We are also finding some of the providers helpful, offering help with some of the most popular exams for free.
Commission was the main source of our income until the mid-1990s when income drawdown first came to the market. We saw that reviews would be needed but they needed to be paid for. At that point, we decided to charge a fee or take trail of 0.5 per cent a year.
Then, in advance of April 2001 and stakeholder, we considered our position again. We decided the take-up on stakeholder plans would be modest, so was unlikely to be worth a lot to us as a business. We moved in the other direction of assuming that advice would be required but on a fee basis only.
We recognised that two distinct camps would emerge: Those not really interested but - to satisfy the legal requirements - would be prepared to set up “empty box” schemes and those interested in establishing GPPPs and perhaps a death in service scheme.
We prepared draft reports for each situation and agreed that we would only deal in commission formats if the client insisted. We still have some way to go but our fee proposition is now much more structured than, say, 10 years ago and we do not think that this will be a barrier.
In terms of our processes, our fees were a little hit and miss and without structure. We reviewed our process and that added structure and now it works extremely well. We had an issue of reconciliation of contributions under GPPs each month but that has largely disappeared as we have moved to handling matters for all clients ourselves.
The next big issue came with TCF. We knew we were applying TCF principles but we could not always prove it. We started a review of all our major classes of business and moved to standardise our position. The end result was a reconciliation of higher charges to the service standards offered. We now offer four separate service menus and then moved this process through to other areas such as open market work.
Capital adequacy remains an issue. It seems that the greater the structure and qualification levels, the greater the cost to the business. The FSA’s views seem to support very low salary levels, with a high production bonus. I thought that the days of the “commissionhungry salesman” were gone. This adds to my belief that Governments and linked bodies really do not have any real idea of the workings of small businesses.
We outsourced compliance, we recognise that we are not in a position to be up to date on compliance issues on an in-house basis, so we employ a third-party compliance firm to advise us on the range of issues.
We also looked at what was happening to other IFAs, particularly at the smaller end. Consolidation is inevitable and will move apace in the next few years. Costs and efficiencies will be required if we are to survive and, if we fail, we might be forced to sell/merge our businesses but if we succeed, there are good opportunities to buy other businesses.
The great worry for me is the attitude of the FSA to the bigger organisations. Do they look at the excellent service many IFAs can give to clients or do they prefer someone who makes errors but can afford the compensation and fines?
This brings me to my last question - can we afford to be independent? I am naturally optimistic. Yes, problems will arise but IFAs should be natural problem solvers. It has become clear to us that, despite our concerns about our own future, there could be opportunities to help other IFAs in areas such as full open market annuity reviews, including underwritten annuity options, GPP admin and business protection planning.
We also need to decide whether we can make a profit in the new environment. It offers us certain advantages - under a fee structure, you can’t do “unpaid” work as you would on the commission structure. Equally, TCF forces us to take an even-handed view of all clients in the same category - we can use this to deflect clients seeking a discount not given to other clients.
Clients who are not serviced cannot produce commission income after 2012. We plan to take on a three-year trawl through our 35-year-old client bank and separate clients into those who do not require our services and those who do. For the latter, a suitable fee will be required, whether a retainer, fund-based commission or ad hoc fee charges.
We also need to focus on what we are good at and recognise what we do not know and what we don’t want to do.
We prefer to sub-contract certain elements, as the PI position is more beneficial to our business. Likewise, we want to develop links with other IFAs who also believe that there are areas they prefer to avoid.
Comment: Focus on the quality of your advice
The background that you have provided demonstrates that you have given careful and considered thought to he issues you face and I will take your five questions in the order you have posed them.
Do we wish to remain a directly regulated business?
You have stated your position clearly and by remaining directly regulated you remain in control of your destiny but you bear your own costs.
However, the benefits of belonging to a network - if that is the alternative you are alluding to - enables intermediaries to access competitive contract terms, business support as well as responsibility for compliance in exchange for them taking a percentage of your turnover.
You mention that you outsource compliance and you might want to at least compare what a network would charge as well as a service provider such as Bankhall, threeesixty or Simply Biz. If you use a service provider, you would still remain independent but also have access to services and a comparison exercise will enable you to ensure that you are obtaining value for money and to compare the relative benefits.
Do we qualify as “independent” in a post RDR scenario?
The answer to this question will depend on the final shape of the regulations which are due to be published in 2010 but from what we already know and the steps you have or are taking, you are likely to qualify if you achieve your goals.
What is important as you make changes in the lead-up to RDR is to actively monitor the progress of your advisers and to ensure that they get through their exams and to build in the contingency for the need to re-sit some along the way. The pass rates confirm that this is a necessity and starting now rather than waiting for possible changes are likely to reduce the challenges that the examinations pose. 3:
What is happening to other IFAs?
By keeping abreast of what is happening to other IFAs, you can benchmark your own firm agains them and identify opportunities to improve profitability whether by adopting and adapting ideas they provide you with. As you also say, if you succeed, you can potentially make acquisitions.
However, the decision to acquire another IFA should not be taken lightly. You are potentially risking the financial security of your business and the amount of time involved can on occasion be considerable and divert time away from dayto- day activities. The method of purchase and financing need to be carefully considered and you should get professional advice to obtain the right structure and contain the risks.
Can we afford to be independent?
You evidently have concerns about the attitude of the FSA and their approach to smaller firms of IFAs. The key is to ensure that your company’s governance, risk and compliance processes are robust, as are your systems and controls. You outsource your compliance but in any event, a periodic external third-party review of your firm’s activities can help ensure that areas of concern can be addressed and that processes can be improved.
Can we make a profit in the new environment?
The answer to this question is an emphatic “yes” but only if you know what your costs are and also only if you have the means to control them. The key to knowing your costs is to build up the cost of advice on a step-by-step basis and not to make assumptions or worse still to adopt the fee charges made by other IFAs without proper analysis.
The other key determinants in making a profit in the new environment are the quality of the advice you offer, the level of service you deliver, the use of technology but above all being able to clearly explain how you can and will help your clients achieve their goals and aspirations. All this is only achieved by continual focus and hard work and you are already well on the way.
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