Reading some of the industry blogs, you would think that the five issues facing the profession were RDR, RDR, RDR, RDR and RDR.
Without ignoring the RDR, can I suggest that there are more profound and strategic issues facing the profession? Indeed, you could argue that some of these issues are driving RDR rather than the other way around.
Before looking at these issues in some form of order, let’s start with a look at the future – or is it futures? The position in which we find ourselves is that, as a profession, we are faced with a range of future business models. It is important to remember that these are not better than each other – “just different”. The key word here is business. We are all in the business of manufacturing advice – at a profit. And we must remember that this includes managing our liabilities. The fact remains that many IFA firms are where they are now by accident. We often see that firms have different internal models and often a lack of strategic direction.
So, taking these key issues in turn:
The first one is increased consumerism and globalisation. In essence, this involves higher expectations of products and services and the ability to purchase from anywhere – the rise of the internet. This is all worth an article in its own right but I will refer you to the video Shift Happens 2 on Youtube ’We must ensure that we add value to our clients through wisdom and judgement, not just knowl- edge and facts’and The Earth is Flat by Thomas Friedman.
We have been seeing the increasing democratisation of information – via the internet. You can Google anything and clients can find out facts about anything in minutes.
But we have to be clear that information is neither knowledge nor wisdom. So we must ensure we add value to our clients through wisdom and judgement, not just knowl- edge and facts.
Linked to this process is the increased commoditisation of products. As they become more similar, so we will see the distribution of simple products such as term insurance/Isas and mortgages from Tescos and Amazon. They are much slicker at distribution of products and, importantly, are trusted by consumers.
Which leads us to our next point – trust and perceived value. We know that consumers value:
- Our advice and their relationship with us very much
- Ongoing service if it is appropriate
- Transactions and implementation, not very much
But how did we/do we get paid?
- Transactions – mostly
- Service – a little bit, sometimes
- Advice – historically not at all
So, what did this teach consumers about our value? In short, advisers need to spend more time where clients perceive value. And we need to ensure that our KPIs and systems reflect the required activity. We then need to “industrialise” our processes where the client does not perceive value. In other words, use technology to deliver “hygiene factor” tasks cost-effectively.
But we also need to educate clients to value the tasks that we carry out for them that do add value. Why is it that clients do not value what we do – is it about what is tangible and intangible?
Is our job to ensure that consumers see a tangible value in the intangible advice process?
The third challenge is that of succession and recruitment. The myth is, the average age of an IFA is 54. In reality, advisers are mature but no older than other professionals running a practice such as solicitors, accountants or vets. I would suggest it’s the shape of the career that is the problem. We need to attract career-minded younger people. Graduates, in other words. But there are barriers. Graduates do not have client banks. Graduates do not really want self-employed commission-only roles. But, equally, graduates know they need to learn before they earn.
We need to consider the roles involved in a practice and think about team working and job roles. In short, looking at the underlying structure of an IFA practice, taking a task-driven approach.
This looks like the following:
- Planners are responsible for strategy, have the main clientfacing role and the most interaction with introducers
- Paraplanners prepare the plan, carry out research and put together cashflows but still have substantial client interaction
- Administrators act as a PA but still have some client contact.
In short, the classic financial planning team.
An issue that is only just appearing on some IFAs’ radar is that of the issue of intergenerational transfer of wealth. In the main, advisers are usually in the decumulation game. In other words, clients are trying not to run out of money before they run out of life. If we are successful, there will be money “left over” at death. This implies a intergenerational transfer phase. So what strategies do we have when dealing with the transfer to baby boomers and Generation X?
When do you have your first contact with the heirs? When they have invested – or possibly spent – the money? Perhaps with their bank? One potential issue is, what is the age gap between you and these new clients? How long can you promise to look after them? ’We need to consider the roles involved in a practice and think about team working’The fifth and last issue is the perennial one of building a capital value when exiting the business. In essence, you can’t sell and run and own the practice. So who can run your practice when you go?
For most IFA firms, this exit is almost always as a result of a sale and, in turn, this almost always results in a closure of the firm.
This is an article or book in its own but the key issues are:
- What are we selling? The clients or a brand?
- Are we selling the income stream or a profitable business?
- Do we “own” the clients – and hence the income?
- Do we understand where the income is coming from?
- Do we have a good cultural match with potential buyers
There is concern that some IFA practices are getting overly focused on the deadline of December 2012. While this remains a critical deadline, it is vital that IFAs keep an eye on the bigger issues coming over the horizon.