A certain madness grips some people during times of great change. Some argue for a vision of the future so forcibly that others simply follow, repeating the vision over and over until it is accepted wisdom.
At the time of polarisatIon it was like that, back in the late 1980s. The banks would begin to dominate, life companies would have multi-channel distribution by owning direct salesforces, linking to building societies and banks and buying up estate agency chains. The poor old IFA, confronted with all of this big brand domination, would tie or be reduced to a rump.
It did not work out like that and it is worth emphasising what we learned from the great polarisation experiment. It is simply this – over time, people eventually found their way to quality advice and, in that process, IFAs grew stronger.
We are at a time of great change once again. As ever, history will not repeat itself exactly because we have a different set of circumstances at play. This time around, we have:
Fewer life companies and with smaller pockets.
Consolidation among manufacturers, asset managers and distributors.
Dramatic demise of with-profits.
Reduced margins all round.
Depolarisation and multi-ties.
Transparency and unbundling of advice from product.
Critically, there is a clear disaggregation in the value chain taking place. Life companies are struggling with the double whammy of coping with generations of unwieldy legacy products and the terminal decline in with-profits sales. With whole books of business likely to go out the door, they are badly placed and could even revert to being simply risk providers.
The power has moved down this value chain and clearly lies in distribution. This is happening at the very time when IFAs with their set of problems are examining their own business models.
There is an urgent need for a more efficient, lower-cost operating model. The combination of new thinking, open architecture and the arrival of platforms has opened the door to new entrants with fresh ideas and no baggage. This is also happening at a time when there is a real need for people to save. So the opportunity for advice is greater than ever.
Paul Myners and Ron Sandler stimulated some of this new thinking in the IFA community and particularly the latter's criticism of their approach to investment advice. It brought asset allocation and modern portfolio management theory to centre stage.
What we are witnessing today is a move away from the traditional transactional, event-driven practices of the past to the building of sustainable IFA businesses, client and advice-centred and value deeply embedded within them.
As Cerulli Associates correctly identified, the UK market will see explosive growth in both the use of platform technology and multi-managers. To many observers, that is shorthand for wrap accounts and such is the pace of this development that it is aired like a mantra as the greatest single solution. There will be undeniable benefits but IFAs should consider their arrival in the context of their own business model.
Successful advisory businesses in the future must be clear, crystal-clear on who their clients are and who they are trying to attract (segmentation), their client value proposition (their offer) and how they will deliver that service. They also need to be clear on how they will price that service and how they will make a profit from each client.
Having achieved clarity on all of that, they will need to examine their approach to investment advice. How will they construct portfolios? Will they research the market, pick retail funds, build asset allocation models and regularly rebalance them? Or will they construct a business model that outsources these functions to specialist manager of managers, repositioning themselves with their clients.
They are buying in world-class expertise while retaining responsibility over the most important area, which is strategic advice to clients. That is one function which is never outsourced.
This business model reflects a practice established by successful advisory businesses in other parts of the world, the US and Australia particularly. There, the focus is firmly on delivering quality strategic financial advice. The whole advice process is streamlined with portfolios constructed in line with client attitude to risk and regularly rebalanced. Adviser time is released to see more clients more often and all the evidence suggests they are prepared to pay handsomely for that advice.
As we move into this new period of change, those IFAs who follow outsourcing unproductive and, if recent Australian research among clients is accepted, unvalued functions will be best placed to build funds under management, embed value in their businesses and deliver quality client experiences. That is a fashion worth following.
John Cowan is general manager of Pivotal, part of The National Australia Bank Group