Consultation on the retail distribution review has only just begun but already it appears that advisers will have to change how they operate.
Informed Choice managing director Nick Bamford says: “A lot of people probably have not yet come to terms with the fact that the regulator believes the intermediary models have been broken and it will take action to fix it.
“I suspect a lot of advisers have not improved their professional qualifications and have been pretty much comfortable with selling financial products in order to be paid, so I would categorise a lot of my peers as independent financial salespeople, not independent financial advisers.”
Bamford has already taken steps to reshape how Informed Choice does business and says it can be a powerful tool to help explain the value to advice to clients.
Chartered Insurance Institute director general Alexander Scott says many advisers are already en route to becoming professional advisers. The CII has over 1,000 chartered financial planners on its books and more than 9,000 people are past the halfway stage towards reaching chartered status. He says this means there will be around 10,000 chartered financial planners in the next seven years.
Scott says: “The professional financial planning model fits with current developments in the market which are not related to the FSA’s proposals at all. Advisers are already moving down this track in substantial numbers as they see the benefits of a professional long-term relationship with their clients.”
The cost of qualifying as a chartered financial planner is around £3,000 but the costs can be recovered quickly, as an increase in professionalism should lead to a more higher flow of income for a firm.
Scott says: “Put bluntly, a professionally qualified adviser would be able to charge more in fees than the adviser or salesperson who is not qualified. There is cost associated with making any change.”
Evolve Financial Planning director Jason Witcombe says: “If you want to be seen alongside other professionals, I think this route is the only option. People recognise that you need to get more qualified.
“The exams do cost a reasonable amount, both financially and in time – 30, 40 or 50 hours of studying – so it is more a time cost than a financial cost.”
Bamford says the rewards are there for businesses that get it right. “We saw our profits improve steadily as a result of the business changes we made so it does not have to come with a real cost to the business. I think that the payback comes really quickly after making the changes.”
However, if advisers move en masse towards the professional model, there are concerns that only high-net-worth clients will be able to afford advice. Witcombe concedes that adviser firms may end up asking clients to leave.
Deloitte insurance partner Andrew Power says lower and middle-earners may end up dealing only with banks. He says: “The RDR provides opportunity for financial institutions to develop professionally branded advice around full, focused or primary advice models. This is particularly true in the underserved mass market, the natural home of banks.”
Power raises the possibility that many small IFAs who do make the move towards professionalism may find themselves driven towards merger or acquisition to “seek the safety of a large financial institution that can help provide the infrastructure to develop, boost or maintain higher professional standards”.
But Scott does not believe the market is about to see a flurry of merger activity and does not expect advisers to lose their smaller clients.
He says: “The clients of the primary advice arm will become the clients of the professional arm over time.”
Some businesses have already decided to move towards professional status but many are waiting to see how the RDR consultation develops.
This inertia may have been caused by the FSA’s failure to clarify whether the general financial adviser label – where a big portion of small independent firms would be likely to operate – will be a permanent title or temporary refuge. But delay deciding on a course of action may end up hurting advisers.
Bamford says: “Anyone sitting there saying: I will just carry on as I am for the next two years is going to be in for a bit of a shock.”
Scott says: “The FSA must allow an adequate time for consultation and then produce feedback on the consultation. Any proposed changes that arise would need to be subject to a rigorous cost-benefit analysis. There would then be a transitional period of three or more likely five years. As a result, we are looking at a seven-year process, not something that is going to happen next year or the year after.”
Bamford says smaller firms need to voice their concerns to the FSA.
He says: “The FSA very cleverly has suggested that the remedial action needed is going to be suggested by the industry itself, so advisers need to take part in the debate.”