The retail distribution review has confirmed the fears of many traditional financial advisers whose practices have been predicated on new business, fuelled by provider indemnity commission.
Over the next two or three years, during the pre-implementation period, prudent advisers, whether tied or independent, must start to investigate ways of migrating to a new business model. For the majority, this will involve greater fee-based business and the introduction of more rigorous client management, servicing and monitoring methods.
Technology plays an increasingly important role as the enabler for providers and distributors as the new regulations take effect. Using online, e-services, integrated with a client management system allows advisers to keep solid data-based audit trails of all their client communications – which are essential for the regulator to monitor firms.
The warning signals from the regulator have been around for many years, certainly since the introduction of hard disclosure back in the mid-1990s, a move that spectacularly backfired on its intention of moving advisers to non-indemnified commission and fees.
IFAs are nothing if not robust and resourceful and tactics were deployed to justify their good work with the consumer and the time spent on the advice process, resulting in a dramatic rise in business that year.
Life insurance is generally sold and not bought and the hurdle of a fee to execute the business, often when the client can least afford it – young family, one income, sizeable mortgage – could prove counter-productive to a thriving financial services sector.
Maybe this kind of transaction-led business will become the domain of call centres, both advised and non-advised, an area that is growing significantly at the moment.
At the other end of the advice spectrum, we also have to look at the RDR’s proposals on extending qualifications. There are close to 105,000 CFPs worldwide, compared with just 700 in the UK. CFPs generally champion a lifestyle financial planning model where cradle to grave advice is given, a servicing rather than sales culture. They take a longer-term view and base their advice on strategic asset allocation and diversification as opposed to selling products on a commission basis. Their role is to act as coach, mentor and project manager to their clients. They charge fees for set-up of the initial financial plan to remunerate them, and retainers for the ongoing advice, which can indeed be commission offset.
In this scenario, commission is not necessarily viewed negatively and this is akin to the RDR’s new distribution model of customer-agreed remuneration, whereby “commission” is negotiated between the client and the adviser and taken from their product purchase cost. This sits well with the introduction of factory gate pricing, allowing both the adviser and consumer to view the products at base level.
The RDR itself asserts that technology is crucial to success, playing a major role in CRM and, at point of sale, particularly with the introduction of primary advice and the virtual adviser.
Speculation about single wraps being unacceptable in a world of independence gives further encouragement to the leading CRM suppliers to offer an aggregated service based on multiple platforms.
There may be scepticism about how IFAs can play in the virtual adviser arena but the winners will be those with the best transactional hubs (websites) and biggest brands – a domain of banc-assurers and possibly well funded new entrants.
As we saw from the dotcom boom and bust around the turn of the millennium, a B2C model can be a high-risk strategy and brand is critical.
In simple terms, the industry is polarising into an advice sector – high end – remunerated by fees and a commodity sector for the lower end of the spectrum, likely to be dominated by big brands and call centres.
In order to compete at the much sought after HNW end, advisers need to look at a winning model, based on charging fees to clients, and enhancing cost-efficient service through technology.
The demise of definedbenefit pension schemes, changing demographics of an ageing population and a property market that continues to defy gravity, all equate to a prosperous and successful future for those advisers who find the right model.
Historically, IFAs have rolled with the punches and continued to succeed in their own ways but the days of operating with paper-based administration, inadequate client records and selling products for income are now numbered.
The winning adviser model is about making sure that economies of scale are realised and technology is embraced throughout the process. This starts from the adviser’s choice of back-office system through seamless links to advice tools, quotations and their chosen wraps and platforms. Point f sale systems have historically been the domain of the direct salesforce but clients are increasingly growing to expect technology at point of sale, so we should not disappoint them.
To compete in the protection arena cost-efficiently, straight-through-processing needs to be ruthlessly employed, from e-submission of new business to electronic reconciliation of commission, driving out slack wherever possible.
A consumer website for clients to view their own portfolios and simulate what-if scenarios through simple stochastic modelling and forecasting tools is also gaining prominence.
The future can be bright, and the RDR can have a positive impact. A new dawn is beckoning for technology-savvy advisers, with a range of distinct customer value propositions, based on needs, wants and appetite for real advice.
Whether the client requires face-to-face professional financial planning or primary advice on the web, a solution is necessary to meet all scenarios. For those embracing technology, the transition to cost-effective business models, with the ability to handle a complete but segmented client base, should be within easy reach.