What is the ideal format for a new-style financial adviser in the era of adviser charging?
Of course there cannot be only one answer to this question, just as there was not pre-RDR. But perhaps we can already see some plausible answers that will give rise to different types of adviser firm in the new era.
First, there is the ‘big is best’ brigade, determined to consolidate old-style advisers who lacked a compelling client proposition into a slick nationwide operation.
Most have concluded they cannot do this as ‘independents’ as defined by FSA rules. The problem is not researching obscure financial products; it is having auditable processes that confirm that advisers have checked whether clients would benefit from such products.
Incorporating this requirement into a top-down advice process is difficult and compliance officers and CEOs of such firms will want to sleep well. So while large-scale national adviser firms will exist, they will in my view almost all be restricted and will have very prescriptive investment propositions (DIM or model portfolios or risk-rated multi-asset OEICs).
As to the potential for these firms, nobody who has watched the industry for the past twenty years can be under any illusions about how difficult it is to create a national adviser firm.
Plenty of bodies, not to mention hundreds of millions of pounds, have floated down the river and I think a few more will probably join them. Success will require excellent management.
Many wealth manager firms have decided to operate under the restricted label.
Here we can expect to see a lot of differentiation. ‘Family office’ style operations are attractive to the really wealthy, but can they extend down into the realms of the middling rich? And given the FSA’s damning criticisms of wealth managers, can these firms set up processes that ensure they give a bespoke service while remembering to do proper risk profiling and product research?
I suspect that some wannabe wealth managers will fail on all counts, a few bank-owned and independent operators will succeed brilliantly and many others will plod along, surviving only because of in-house referrals.
The big unknown is what happens to the large number of ‘general practitioner’ IFAs in the new era.
Some lament that they cannot charge the fees necessary to earn a living, even though they used to collect larger amounts from clients in commissions. For many of them the grim reaper awaits, or they may choose to enter the gently smiling jaws of a consolidator.
Some contend that the days of the small-scale IFA are over.
I disagree. You have never been able to buy so much technology and research so cheaply.
For around £7,000 a year you can have all your product research on tap plus back office, risk profiling and a basic compliance service. If they have the service proposition and access to the right clients I do not see why small-scale IFA firms should not survive and prosper.
But the real winners in my view will be medium-sized regional firms. The reason is that they can remain small enough to handle the requirements of independence on a case-by-case basis, yet be large enough to afford the bespoke research they will need to buy in areas where they do not have in-house expertise (such as VCTs, pension splitting, equity release). Most importantly, firms of this scale can form deep relationships with accountants and solicitors.
Chris Gilchrist is director of FiveWays Financial Planning, edits the IRS Report newsletter and is the author of the Taxbriefs Guide, The Process of Financial Planning