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Advisers get wake up call

In my last couple of columns, I have looked at ways in which fund supermarkets and other technology-based services such as wrap accounts can provide IFAs with opportunities to restructure their proposition to customers and the way in which they are remunerated.

Last week, I was told that the Financial Services Omb-udsman has given its first judgement against an IFA in relation to an income-drawdown case. The story relayed to me, although it is not the policy of the ombudsman to confirm details of individual cases, provides a further example of why a radical restructure of operating methods is not an option but a necessity for any advice practice that wants to stay in business.

It may be something of a wake-up call to see how the depth to which advisers are expected to analyse funds but the circumstances of this matter can suggest opportunities to attract new clients. If advi-sers are prepared to adopt new ways of working and embrace technology to support them, the depth and quality of advice to clients can be significantly enhanced.

As I understand it, a compensation award in the region of £100,000 has been made against an IFA. Apparently, although the adviser identified that the client had a relatively cautious attitude to risk and had placed the client&#39s drawdown capital within a managed fund, the adviser had failed to identify that some 71 per cent of this managed fund was invested in equities. It is not difficult to see where problems could have occurred, given the collapse of equities in the last couple of years.

Against such a background, it is perhaps no wonder that there is the present crisis in the market concerning the lack of capacity for IFAs&#39 professional indemnity cover. With an inc-reasing number of early drawdown cases coming up for their second triennial reviews against the precedent that this case appears to create, it is hard to believe that similar cases will not come to light in the near future.

This is a prime example of the fact that although IFAs may still use the same generic title that was created a decade and a half ago in the run-up to the original Financial Services Act, the role they are expected to carry out is vastly different.

How many advisers in 1988 would have expected it to be part of their role to regularly review the underling content of a particular fund to identify if the investments meet the fund&#39s stated objectives? Yet today it would appear that the ombudsman expects exactly that. To be fair, it is reasonable for a client to expect such an analysis to be carried out. I just wonder how many advi- sers budget for carrying out such reviews regularly when calculating their charges or commission.

To me, this suggests that every adviser should be carrying out regular reviews of the underlying investments within a client&#39s entire portfolio while at the same time reviewing the client&#39s attitude to risk, making sure that the investments are consistent with the client&#39s requirements.

If you do not, the client can probably rely on the benefits of such a review. The only problem is that it will be the adviser&#39s indemnity insurance that is at risk.

Fifteen years ago, this sort of analysis would have taken days to carry out if the necessary data was available. Now there is a plethora of software tools not only from fund supermarkets and platform prov-iders but also organisations such as Morning Star, FT Fund Research and Citywire that enable advisers to carry out a wide range of comparisons on issues such as underlying assets, the success or otherwise of individual fund managers and other issues.

Such activity is clearly timeconsuming and clients should expect to pay for it. However, how many investors get such analysis from their advisers on a regular basis?

The number must be very few and, against the invest-ment volatility of the past couple of years, can there be a better way? If an adviser has access to the tools that make such analysis possible, is this not an ideal opportunity to market such a service.

No sensible adviser will have taken maximum initial commission on drawdown business. It has always been obvious that there would be an ongoing need for advice, particularly in the area of asset allocation. This is, however, far from the only areas where such an approach can be taken.

How many clients will have a detailed analysis of the underlying investments in their money-purchase pension sch-emes while the assets are accruing? How many clients have six-figure and seven-figure sums invested in funds moving towards retirement?

Is there a market in offering such clients a profile of what they are really investing in, especially if you were not the adviser who originally sold the contract?

Taking this approach to other assets such as old Pep and Isa investments makes them ideal for transferring into fund supermarkets offering greater diversity of investment choice so that the client attitude to risk and investment strategy can be more closely aligned while at the same time providing a suitably transparent vehicle to remunerate the adviser for their actions.

If such assets were held in wrap accounts, it would, of course, be far easier to charge for such services against the assets under management. There is certainly a market for a predatory approach to managing assets in excess of a certain value where 1 per cent annual charge is in fact excessive.

We have recently been working on a number of models that examine in more detail how this may be achieved. In the meantime, however, the suggestion that the ombudsman has made an award along the lines outlined above should serve as a lesson to advisers and clients of the importance in changing economic climates of upgrading the nature of their advice to include services appropriate to the time. This should certainly be something that consumers should be prepared to pay for.

All too often, I hear IFAs say that they do not want to use technology, particularly in front of clients, as it undermines the value of what they do. I do not believe this could be further from the truth.

Showing a client that you have invested in the technology to be able to have vast amounts of detailed information at the your fingertips can only help to reinforce your proposition. What better way to demonstrate that you are taking a scientific approach to managing their investments?

Such services can only help in demonstrating a clear compliance train and keep the spectres of ombudsman and professional indemnity insurers at bay.


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