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Danby Bloch: Getting it right on management information

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The management information you need to control your business should have changed radically as a result of the switch to adviser charging. It takes rather more effort to define and collect but it is essential to set up a relevant and robust system. Not only is the FCA very keen on the idea but it is also crucial to understand what is going on in your business in order to run it successfully.

So, what has changed that means you need to rethink the MI you should be collecting in quite such depth? It is the disappearance of commission and its replacement by adviser charging. Once upon a time you could depend on product providers to tell you what business you had done: the types of contract, the providers, how much you earned. Now you cannot depend on providers or platforms to the same extent. The information is coming in differently and needs collecting and collating.

Crucially, you need to know what your firm has promised clients it will do and whether it has done what it agreed to. Partly it is a compliance matter of treating clients fairly but just as important is the commercial issue of being able to answer the potential question from clients: what have you done for this money you have charged me?

The starting point should be the list of risks the business faces in a range of different areas. Some of these risks are pretty familiar and have been around for many years; for example, concentrating business with too few providers. However, some of the risks are new; for example, making sure advisers carry out the reviews and other work they have promised to clients. Big changes have been needed in relation to the nature of the activities firms undertake.

Meanwhile, there are other points to consider covering financial performance by a number of different key performance indicators: profitability, profit per employee and return on capital, for example.

Focus on core data

A modern back office system can produce a vast amount of information. Be careful, however, as it is only too easy to produce so much that you are overwhelmed with the result and will not see key patterns emerging.

One piece of core data will be assets under advice, according to the type, underlying asset class, provider and whether they are held on or off platform. From this you can see the balance of investments advisers are advising on.

Another core dataset will be the different types of income streams. Some, like most forms of commission, will be disappearing; others, like recurring adviser charges, will hopefully be rising. You need to know how much is based on the value of clients’ invested assets and how much is derived from fixed fees, time-cost related fees, commission that may continue or commission that is about to disappear.

You should also know where the income comes from in terms of types of clients, existing or new business and the sorts of activities carried out the advisers. You need to know how many advice events take place in relation to those promised.

Risks you should be looking out for include the following:

  • Undertakings to clients: Are advisers doing what they said they would for clients; for example, carrying out reviews and rebalancing. Are clients being overcharged or undercharged?
  • Concentration risk: Excessive dependence on particular advisers, clients, types of charging (e.g. value based) and types of business.
  • Product concentration risk: Excessive concentration on particular providers or DFMs. If something went wrong with one of these, how would it impact on your business and clients?
  • The use of platforms: Excessive focus on a single platform could be an indication of inappropriate advice. Even if it is not, there are concentration dangers for the business if something were to go wrong at the platform.
  • Balance of advice: Advisers may be focusing too much or too little on particular areas, such as protection, making allowances for the profile of clients.
  • Income volatility: A substantial dependence on charges directly linked to clients’ assets under advice is susceptible to market fluctuations. That might be inevitable and the business would then need to make suitable reserves for downturn periods, or it might be worth adjusting some or all of the charging model.

Danby Bloch is editorial director of Taxbriefs Financial Publishing 

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