The rules of the RDR were made too tight for many firms to remain independent, especially larger ones.
If I were responsible for an advice business with, say, 500 advisers, I would only want to use one platform – likely my own. Our proposition would dictate what products we advise on. The majority of clients do not need complex solutions, so I would probably exclude investment trusts and structured products.
By limiting my range to what I need, I require far less research, my training need is far less specific, my compliance risk is lower and my PI cost will be less.
Such logical actions would force me to become restricted – albeit my dependence on product providers would be zero and my product range possibly more than many IFAs. The next step for the vertically-integrated firm? To become a manufacturer of investment products.
Some advice firms employ asset managers to run money for them in segregated mandates; some channel their centralised investment proposition funds into portfolios run by a DFM they own; some place most of their CIP funds into discretionary funds run internally.
In each case, the advice firm profits. I have no problem with this (albeit the regulator might eventually) but I do get irritable when I find a lack of transparency and/or clarity.
It is important consumers know exactly what they are investing in and the total costs involved. Otherwise, we can be in a situation where undisclosed manufacturing costs subsidise advice fees, giving the client a false picture when making comparisons with alternative propositions. Does this impact the majority of advisers? Yes.
The direction of travel is clear: good advice firms are being hoovered up by providers, aggregators, DFMs and the like. Advisers looking to retire in some comfort are only likely to get a decent deal from the big players.
I predict the market will ultimately be dominated by 50 or so big names – the likes of Quilter, Standard, Succession and Brewins. These will all be vertically integrated and restricted.
Then there will be a relatively small number of highly-professional financial firms dealing with wealthy individuals with complex needs.
The successful planning business of the future must have scale to advise on investment, retirement, taxation, protection and care, plus expertise in risk, HR, IT, operations and management.
In addition, digital platforms, aided by big data, will bring banks back into the sector and will gain traction with millennials and those disenchanted by their perception of the advice community.
A final comment. The big advice firms are increasingly likely to be running segregated mandates. If they are big enough they can cut costs and add a bit to their bottom line. This means less money will be going into retail funds as we know them.
Comparison of performance and cost may be harder. The data providers will have a challenge. How will such funds be treated when the client moves adviser or platform?
The RDR had its predictable outcomes. However, the unintended consequences will drive more change than the FSA ever envisaged.
Clive Waller is managing director at CWC Research