A prospective client had a sad tale to tell: she had just received a letter from her IFA firm to say it was closing its doors. It has become one of a growing number of firms finding the industry just too challenging. The message on its website simply states the business has become unviable as a result of regulatory changes.
Principals of many IFA firms throughout the UK will be nodding their heads in agreement. It has become a real struggle to keep margins at a commercially viable level. The options are either to raise fee levels or close.
The problem is not just about everyday battles such as the replacement of commissions with fees, the sunset clause and a growing administrative burden. It is also about fears for the future brought on by a double edged Sword of Damocles cutting one way with potential liability worries over pension flexibility and the other with an increasing cost of regulation, including the capital adequacy requirements due to hit us later this year. There comes a point where some firms will inevitably decide the battle cannot be won.
Part of the problem is that we have turned financial advice into an “all or nothing” proposition. To minimise the risk to the firm we must go through a fully advised process to prove our recommendation is in the client’s best interest. However, there may be room for an alternative route for those who cannot pay the fee necessary for this approach: some form of simplified advice. The issue for us as advisers is that we cannot deliver this if there is any danger client decisions made via a simplified route may come back and bite us later on.
The way I see it, the industry is like a three-legged stool: there is the FCA, the Government and the advice community with a leg each. The regulator wants us to tighten our processes to protect the client through an ever more complex regulatory framework; the Government wants the individual to have greater choice and flexibility to do what they want with their investments; and adviser firms want to deliver a strategy both cost-effective for them and in the client’s best interests, while ensuring they keep their professional indemnity insurers happy. Each has its strength but the big challenge is keeping all three legs of our stool on the ground at the same time.
What every sector in the industry has to recognise is that if we do not balance our stool properly the whole thing will fail and clients will be left with no workable solutions. It needs some serious joined-up thinking to come up with a design acceptable to all three parties.
Yes, we need to protect clients from the dangers of bad advice and from making potentially misguided decisions. Yes, we need a regulator to police the industry and to provide recompense where things have gone wrong. Yes, we need to ensure advice firms are sound both professionally and commercially. However, if achieving those aims results in an affordable advice vacuum, then we have, as an industry, failed.
We are facing a situation where even the strongest advice firms are questioning their future profitability and assessing the risks of continuing. It is time the industry grasped the nettle and admitted the situation is getting out of hand.
Carl Lamb is managing director of Almary Green