Let’s be honest. The RDR will drive thousands of advisers out of business. It will force thousands more to merge in order to survive. It will force several networks into administration. It will cost the financial services industry a fortune and cause downwards pressure on share prices across the board. It will reduce the proportion of the population who receive financial advice and it will dramatically decrease the level of regular savings in the UK.
So, why is the FSA doing it? Simply because its research has led it to three key conclusions – consumers don’t trust financial advisers, commission drives providers and advisers alike to think of themselves ahead of the customer and the lack of transparency in product pricing is confusing to the customer and results in inappropriate product choices and higher costs to the end client.
I have met hundreds of advisers who simply do not recognise these findings. These advisers are professional and highly trusted by their clients whom they have been servicing faithfully for twenty years or more. They are highly transparent when it comes to commission and they ensure their clients completely understand where this money comes from.
While each one of the FSA’s findings can be refuted robustly (and a great deal of printing ink and blog space has been dedicated to doing just that), any good myth is based on a kernel of truth and, in the end, we have to face the facts; these are the results of the FSA’s research and the new rules will be designed to tackle these fundamental issues of trust, professionalism and transparency.
So, while the intended outcomes of the RDR rules are highly laudable, in leaping to the defence of the seemingly defenceless end client, the FSA appears to have forgotten one key inconvenient truth about this industry of ours – financial services are sold not bought.
No-one leaps out of bed with a burning desire to sort out their critical illness insurance, a fear that their pensions may be better off elsewhere or worrying if they have enough regular savings to achieve their financial goals. Ours is not a demand-driven industry. The demand needs to be created and information-based web sites, however well-designed, simply will not achieve this. Face-to-face advice is the only way to create such demand, and the RDR will reduce the number of face-to-face advisers, potentially by as much as 40 per cent if some of the more alarmist research is to be believed.
Another undeniable truth is that – as things stand today – only a small proportion of end clients will pay for financial advice. This is for a number of reasons. It is partly because they have never thought about it, partly because the majority of people do not view financial advisers in the same league of professionalism as lawyers or accountants and partly because only a minority of people receive financial advice today. But it is also because the economics are unlikely to add up for most consumers. The majority of people don’t place themselves in a high net worth or affluent socio-economic bucket; and the majority of people don’t buy a broad range of financial service products from an adviser. Therefore most people wouldn’t be able to afford to pay the sort of advice fees that advisers will need to charge in the absence of commission.
The immediate outcome of the removal of commission will be a very crowded market for HNW and affluent clients and very few investment, savings or pensions solutions being provided to the rest of the population. Bancassurers and banks will sweep up the direct end of the market – but mainly giving the minimum advice required to sell simple protection, ISAs and the like. There will remain a large swathe of the UK population (the “mass market” as the marketers like to call them) who will simply not invest or save, because no-one will be able to afford to sell to them.
I believe this is an inevitable outcome of the RDR and while it may be disastrous for the long term financial plans of millions of UK citizens, it need not be disastrous for financial advisers.
In fact, the RDR presents a once-in-a-lifetime opportunity for those professional financial advisers who are up for the challenge and have the courage to meet it head on. There will be fewer advisers immediately post-RDR, yet the need for financial planning will still remain.
A significant number of advisers will be looking to retire or merge, presenting opportunities for other advisers to grow by acquisition or merger. Lastly, moving your earnings from upfront commission to recurring revenue streams will significantly increase the long term value of your firm.
What would I do if I were a financial adviser wishing to thrive in a post-RDR world?
1. Get the qualifications. This is one of the key areas where I wholeheartedly agree with the FSA. Professional qualifications are the foundation of any profession. Don’t put it off. Do the exams.
2. Calculate your likely future cash flow gap once commission is replaced by fee income. Knowing the size of the future challenge is half the battle.
3. Segment your client base and increase the numbers of affluent clients, whom you know will pay for your advice. Find other ways to service the remainder of your client base as efficiently as possible (web, phone, …)
4. Minimise your operating costs, streamline your processes and become as automated as possible.
5. Build a menu of services to offer your clients; pick a small pilot group of clients and start a new fee-based relationship with them. Deliver a professional holistic advice service that clients will value enough to pay for. Do this asap. Don’t wait until New Year’s Day 2013.
6. Partner with a well-funded service provider or network that will be able to help you prepare for RDR; one that will support you no matter what path you choose and with the financial strength to survive long term.
7. Opt for trail commission as much as possible over these next three years to help bridge your forthcoming cash flow gap.
8. Go broad and expand your range of advice to include protection, mortgages and GI. Not only will the commission from these products help support your cash flow but the broader range of solutions you are able to advise on, the more likely it will be that your clients will agree to regular service fees.
9. Alternatively, become a protection/mortgages/GI specialist and look to merge with another firm.
10. The final alternative is to find someone to sell your business to. Your client relationships have real value – even in the new world.
11. But most of all, analyse your business, make a decision and embrace the change. The “bad old days” of investment commission are about to become a relic of the past.
Campbell Macpherson is a consultant currently assisting the Openwork Network with its strategy.