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And then there were four

Ernst & Young’s insurance sector leader Shaun Crawford looks at how the RDR could fragment the IFA business.

Three clear winners emerged from the Retail Distribution Review: the truly independent, whole of market fee-based independent financial advisers actively seeking chartered qualifications; the bancassurers; and a handful of product providers.

Putting IFAS to one side for the moment, the bancassurers should revel in the opportunity afforded to them by a paper which seems to be scripted for them. Product providers quick off the mark will emerge strongest, but there are only likely to be a few able to do this as the majority will struggle and be held back by problems in their legacy estates.

But what about the IFAs? Those seeking chartered status should be able to demonstrate that their liabilities are adequately managed and thus avoid larger capital outlay.

They will have solid capital provisions and will invest in training and appropriate technology systems to monitor commission, charges and disclosure. But be warned – a pure reliance on trail commission or commission-sacrifice models will bring a swift demise.

The other two consulting papers – platforms and capital adequacy – issued by the FSA in July are as equally important as the RDR. Advisers positioning themselves to get ready for the new business model now will be the smart ones. But sticking to playing on today’s terms will make many others struggle. The critical success factors for the future will depend on advisers having access to the right platforms (not necessarily wrap systems) that enable “trusted advisers” to show a single view of client investments for advisors and clients along with appropriate electronic fact finds, risk profiling, needs analysis, asset allocation and re-balancing tools.

They will need portfolio and product modelling tools and automatic report generation, market leading research and best of class products and funds. The right support infrastructure will reduce the advisers operating costs as well as providing the FSA with confidence that any liabilities are being managed effectively, which we expect will lead to lower capital adequacy requirements.

The RDR suggests that the market should be divided into two parts: firstly, ‘professional financial planning’ and ‘advisory services’; and secondly, ‘primary advice’.

The first tier is divided into two segments. The first catering only for those firms operating a ‘fee-based’ business but using the new customer agreed remuneration definition of fees. This could include ‘commission’ agreed by the client and taken from their product purchase cost, but not from or influenced-by the product provider. Advisers using this model can refer to themselves as independent.

The other segment would cater for advisers who wanted to continue with commissions agreed with providers.

Increasing emphasis on training and qualifications requires a professional financial planner to have either the Chartered Insurance Institute’s chartered financial planner status or the Institute of Financial Planning’s certified financial planner.

Primary advice, in contrast, is designed for less qualified advisers who can provide basic help to ‘consumers who may not be able to access full financial advice’.

Only the first segment, using the new CAR principle, would be entitled to use the ‘independent’ label and a ‘high proportion’ of advisers within these firms would have to attain higher qualification standards. Consideration may also be given to ‘grandfathering’ for advisers wishing to carry over existing qualifications in the interim period. However, a question remains whether the FSA will actually permit this.

Ironically, if these remuneration and qualification-based standards go ahead, the situation could arise where a direct salesperson would be able to call themselves ‘independent’, even though they are advising on a limited product range. The possible confusion for the consumer is inevitable, playing into the hands of the bancassurer and multi-tied distributor.

In reality there will actually be four tiers of advice:

1. Professional Financial Planning – distributors have the choice of ‘professional financial adviser’ or ‘professional financial planner’ label using CAR
2. Advisory Services – ‘general financial adviser’ taking commission
3. Primary Advice – for restricted product sales taking commission
4. Generic Advice – incorporating the ‘virtual adviser’ or web-based sales.

Which one will you be?

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