What is important to remember is that while current circumstances are challenging to say the least, the situation will not continue indefinitely. When the crisis does pass, people will need good quality financial advice more than ever before, and IFAs will be well positioned to meet that need.
At the moment, clients have major concerns. We have seen unprecedented events in the banking world. If you had said two months ago that there will be no independent investment banks left on Wall Street and that mortgage providers Lloyds TSB and HBOS will be ushered into an unlikely union, nobody would have believed you.
Even cash on deposit has seen its halo of security tarnished by defaults on accounts that have topped the tables in the personal finance pages of the national press. We have entered a new era of financial planning.
Advising on the suitability of financial products has gone beyond basic issues of tax, asset allocation and potential for returns. It now extends to an examination of the very nuts and bolts of the financial instruments available to retail investors.
Customers are demanding security, but absolute security is hard to find. IFAs are forced to ask complex, fundamental questions. What is this product made of? What is and what is not covered by investor protection schemes?
Unpredictable financial markets have compounded the advisers’ challenge, and to make matters worse few, if any, of the experts they have looked to for guidance in the past can say they saw this coming.
The oil price has more than halved in just three months, huge fluctuations in the FTSE are commonplace and some emerging markets have halved in value. And with interest rates falling fast, cash on deposit will soon no longer offer the attractive combination of decent returns and absolute security. Advice given just a few weeks ago can very quickly look outdated.
Clients with heavy exposure to equities have suffered large falls in value, and for some, the last 15 months will have proved devastating. IFAs are now advising those nearing retirement or already in drawdown on whether to work longer or accept a reduced income for life. Add in falling annuity rates and falling house prices and many retirees will feel hit by a perfect storm.
Yet despite the profound pessimism widespread in the financial community, need for the product that IFAs offer – financial advice itself – has never been higher.
The IFA/client relationship is all about recommending suitable products for a client, having gained a thorough understanding of that client’s attitude to risk and financial objectives.
While clients are understandably challenged by the concept of collapsing banks, we are seeing a broader acceptance of the idea that unit-linked investments can go down as well as up. This is in no small part down to the good work IFAs have done in educating clients over the years.
However, many advisers themselves will be feeling real pain from the downturn and will be hoping that confidence returns soon. Those with significant mortgage operations will have seen revenue from that sector evaporate. And with both the Prime Minister and the governor of the Bank of England putting out gloomy predictions for the economy, those making their living from placing new investment and pension business can expect a difficult 12 months ahead, particularly as money becomes more scarce for clients generally.
Advisers who operate on the basis of fund-based remuneration will also be expecting to see their revenue fall this year, broadly in line with the values of their clients’ portfolios.
It is likely that those IFAs who have already adopted some of the ideas at the core of the retail distribution review – particularly over transparency and professionalism – will find that the trust and confidence their clients have in them will strengthen as the credit crunch unravels.
Advice has never been a more important commodity, yet those who need it most frequently have little or no access to it. As the FSA delivers the next feedback statement of its RDR later this month, we must hope that it still has in sight one of the early objectives of its review – to increase access to commercial financial advice to a much wider segment of the population.
Recent research undertaken by Aegon suggests people have a much bigger appetite for commercial advice than we might believe, but that they would prefer it to be available in formats that better meet their lifestyles.
Feeling the effects of the current crises most acutely are those not being served by the industry – people caught in the “advice gap”, not knowing where to turn for advice, or those believing that commercial financial advice is not for them. This is something the FSA and the industry must address.
Another area that has become all too relevant in recent weeks is financial capability. Hopefully the FSA will not be diverted from its pre-crunch goal of improving the financial capability of the public and its commitment to the initiative drawn up by Aegon UK’s chief executive Otto Thoresen.
People are asking more questions and seeking more information about financial issues than ever before – a strong case for increased commitment towards financial capability projects.
People who know more about their financial situation and understand the steps they have to take are more likely to become customers of financial advisers in the future. It is in all of our interests to create a more financially savvy population. As for IFAs, with the value of quality advice at such a premium, placing the customer at the centre of the advice process will surely foster a relationship that makes the adviser the one person they do trust.