The old model of the financial adviser as a general practitioner was always a bit warped.
It actually assumed the adviser had ‘free’ access to the expensive technical expertise of people employed by life insurance companies.The old model of the financial adviser as a general practitioner was always a bit warped.
High product charges to cover too-high commission levels meant the costs of this technical expertise were spread out across everyone who bought these companies’ products.
That kind of cross-subsidisation is not a bad thing in itself – it is common in many other business sectors. But just as you would not want a drug company expert’s judgment to take the place of that of your doctor, clients in the long run are not well served by third-party financial expertise whose vested interest is product-centred.
We’re still in transition from the old to the new model. Nobody really knows what its final shape will be, but product providers will probably see less and less benefit in providing free technical expertise to advisers. Already there is less of it available than there used to be.
The gap has been partially filled by third-party services which are partly funded by product providers. This at least reduces the product bias implicit in the old model, but it is questionable whether it is financially sustainable.
Will one of the differences between platforms become the availability of a raft of technical expertise from platforms with slightly higher charges – coincidentally, those owned by large life companies?
Some might see that as a case of ‘back to the future’. My own view – at least until the speakers at the Platforum conference change my mind – is that the declining cost of basic platform functionality means we will see more low-cost, low-function platforms arriving on the scene, making higher-cost bundling a more difficult proposition to sell.
In any case, many adviser firms need less technical support than they used to. This is not because of QCF level four but because in modern adviser practices individuals tend to develop specialisms. Pensions, estate planning and long-term care are perhaps the most prevalent now but the extent and depth of adviser specialisations seem sure to increase in coming years. For example, adviser firms which do not outsource investment will need at least one or two people to focus heavily on investment, and as pension tax reliefs wither away specialisation in EIS and VCT will become more attractive.
The reason many commentators come up with a figure for 10-20 advisers in a modern advice firm is that this provides enough scope for specialisation. A firm with this many advisers and a broad client base will probably generate enough estate planning and long-term care cases to justify the costs of a STEP-qualified and a SOLLA-accredited adviser.
Will other firms decide to specialise in just one type or demographic segment?
Even in the pre-RDR era, there were adviser firms that specialised in pensions, school fees or in advising certain professions. They too often used to rely on external expertise, so doing this today requires them to have more in-house technical expertise.
Catering just for a very specific group of clients can be very rewarding but also carries business risks that do not apply to advisers with a wider client base, and most adviser firms will want to form links with solicitors and accountants which will prevent them from becoming too specialised.
Chris Gilchrist is director of Fiveways Financial Planning, the author of the Taxbriefs adviser guide The Process of Financial Planning and edits The IRS Report