You have been operating as an Intermediary for many years during which your company has expanded and you have a team of five financial advisers, together with back-office support. The RDR holds no fears and you consider your firm is well down the road to meeting the new requirements.
But some of your competitors are not viewing the changes in the same manner and are now seeking to become part of a bigger operation. You have received several approaches and are in advanced negotiations with two firms.
Many of the aspects of the proposed acquisitions look good. You have known the principals for years and are reasonably confident their business conduct has been exemplary. The due-diligence investigation did not indicate any significant failings. Both principals are happy to continue as adviser for the foreseeable future.
Your firm has committed significant resources to researching provider markets, establishing “best buys” and building and maintaining excellent relationships with some product providers to the benefit of the firm and clients. Although these firms are not used exclusively, they have preferred status and wherever possible these will be used.
All your advisers are familiar with the fine detail of these products. The performance can be closely monitored and any variations will be challenged. Although provider markets are reviewed on a regular basis, other providers are unlikely to attain such preferred status unless there are significant problems with one of the incumbents.
But, from pre-purchase discussions, you have found that all three firms are using different providers in the investment and pension sectors. This is an issue you need to address before committing to acquisitions.
How can your firm accommodate a far wider range of “preferred” companies and should it do so? This can reduce efficiency and cause training and competence issues. Can your firm permit two “new” advisers to the business to propose different provider solutions to the same client needs and objectives?
Should you insist the acquired firms place all new business with your preferred providers?
No – and certainly not without detailed analysis.You have already identified the firms are principled and have provided suitable advice and it is unlikely the firms would be using different product providers due to matters of self- interest. It is far more likely the firms have conducted appropriate research and have reached different specific views as to why certain providers should be used in preference to others.
You should step back from the process and, with the principals of the two firms, conduct an analysis of the providers in use – including your preferred providers.
It may well be that certain factors are regarded more highly than others by the three firms, for example, product charges, flexibility, breadth of investment choice or minimum premiums. Where such issues exist, these should be challenged. For example, if one firm uses a provider because of the range of funds and ease of switching, how often is such a benefit used?
You should be prepared to accept and respond to challenge to your own firm’s research conclusions and preferences. Your firm would not be the first firm to have a long-held preference for a provider and failed to recognise the benefits of competitor/s, so be prepared to change your views if the need arises.
Emerging from this discussion should be a consensus opinion on preferred providers. In an ideal world, there would be just one provider per product. More likely and in the spirit of compromise, this may perhaps be one main preferred provider with the others available for selection in specific circumstances.
Of course, even though the firm may have preferred providers, it is essential that if the firm is independent there is a comprehensive and fair analysis of the whole market and no bias or restricted advice.
Having agreed the preferred providers can you insist that the clients transfer benefits to your preferred providers?
No. At best the firm may recommend a switch. However it may not unilaterally transfer clients from one provider to another (unless of course the firm has discretionary powers which are not the subject of this article and the switch is suitable for each client).
It is likely to be most efficient for the firm to operate with as few providers as possible, but this must not be done at the expense of the client’s interests and in doing so there are risks to the firm’s independent status. Since the firm is making a recommendation it is imperative that this is in the best interests of each individual client to whom the recommendation is made. Furthermore each recommendation must be based on a comprehensive and fair analysis of the market and unbiased and unrestricted.
Transfer costs (and risks) should be reviewed to determine if these exist. If there are costs involved then the firm needs to justify the need to switch far more clearly– and if the main benefit is efficiency for the firm then perhaps the firm will need to consider subsidising such a switch subject to the overarching suitability requirement.
It is essential that at the very least any drawbacks to the client are more than offset by the benefits. Bear in mind that what may be of benefit to one client may be of little or no interest to another. So this exercise will generally need to be conducted on an individual basis and a blanket switch will not usually be an option.
If there are no charges or risks in transfer then the recommendation is easier. The benefits of transferring will have been identified through the ‘preferred provider’ process outlined above and can be communicated to the client with the recommendation, where appropriate to switch.
Finally when making the recommendation, all clients must receive full information about the proposed transfer with all benefits and drawbacks clearly set out in writing.
Simon Collins is managing director of Resources Compliance