Chris Davies: Don’t let our industry be cannibalised

DaviesChris

With a landmass of approximately eight million km2 and 6.15 per cent arable land you would expect Australia’s population to be far higher than its 23 million. The landmass of the US is only just bigger at 9.6 million km2, yet the population stands at 318 million. Why the disparity?

The answer lies in the loss of young men in both the First and Second World Wars. Such tragic casualties adversely affected a young country, with a delicately balanced growing demographic. A tough analogy to use I know but somewhat relevant when we consider the effects of the waves of government policy, regulatory change and increased levies in the UK financial services industry.

In Australia, where the change to fee-based services took the best part of 10 years to achieve, the bigger players were the only ones to survive, mainly down to deep pockets. Younger models could not make the transition, as they did not have the trail income and clients to succeed.

Is this a warning to the UK market for the next 10 years?

Post-RDR and a liberalisation of the market through changes to the Isa and pension savings regimes, alongside an evolution of new technology, means we are no doubt within our own distribution turbulence. With a price war for factory gate pricing and polarisation of advice availability the UK market is facing some stark realities. Questions need answering:

  1. What will the value chain costs need to be?
  2. How can we best communicate fee-based advice?
  3. What will the client appetite be for cost of advice and will they orphan themselves if they do not see value?
  4. Can platforms offer real flexibility within their charging structure and inter-platform transfer mechanisms?
  5. Is the move to clean share classes in April 2016 addressed from an on and off platform basis?
  6. How can the mass market be best served without advice?
  7. Which business models can survive based on increased costs such as Financial Services Compensation Scheme levies?

We must protect, encourage and support the innovation being seen within the industry to ensure healthy competition through the next few years. We do not want to see a cannibalisation of an industry where it is the large players only who survive.

Firms that research their practice, client needs and market forces, while embracing technology, can develop streamlined and agile business models that will become cost effective for both their advisers and clients. How can this be done?

  • Segment: Clients are now more discerning than ever. Ensuring you have a segmented centralised investment proposition that demonstrates suitability and services each part effectively means clients will value your proposition.
  • Cyber-advice: We believe there is a place for cyber-advice where firms buddy with new technology to service their carefully segmented client banks. Our latest survey shows a large uptake in the use for cash flow modelling, which is great. However, this needs to be carefully integrated into the advice process, incorporating all operational systems and staff responsibilities.
  • Ask the right questions: We find firms are not addressing back office technology in the right way. Starting with the client needs, who the firm is and why it exists is one of the best strategies before selecting a third party solution.
  • Embrace Mifid II: This piece of regulation will affect the advice market positively if it is understood and implemented correctly. For example, a sufficient range of products is required for independence rather than a whole market approach, while scrutiny on structured products and the value chain will mean products becoming far more transparent and customer price friendly.
  • Think strategically: Do not just employ basic business management techniques. Ensure you identify and assess all internal and external resources, and calibrate them against short-term goals and long-term objectives.
  • Beware the vultures: There are always bigger fish in the sea. They too are trying to ensure they sustain their welfare and many are now buying up distribution channels. A well structured due diligence strategy is required at board level for any adviser firm with an ambition to sell the business and ensure they protect it from a hostile takeover.
  • Future financial focus: Do not value your business based on historic product-facilitated income streams. It is those businesses mandating their clients directly (for example, by moving to retainer fees) that can confidently predict their client loyalty and sustainable future cash flows.

Chris Davies is managing director at Engage Insight