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Forum for the future

The Money Marketing G80 summit on distribution, held at the Celtic Manor in Wales, was the first forum designed solely to help the IFA community shape its own future.

Inspired by the format of the Group of Eight (G8) summits on global economic strategy, the Money Marketing Group of 80 (G80) summit allowed IFAs to share their vision of the future with their industry peers.

The G80 was designed to maximise interaction and discussion both within the IFA community and between IFAs and product providers. It was structured as a series of seven workshops dealing with different aspects of the coming changes – interspersed with panel sessions, which were reported in Money Marketing two weeks ago.

The workshops gave key IFAs and product providers the opportunity to talk freely about how they saw distribution developing after CP121.

At the end of each session, the workshop leaders were asked to fill out feedback forms on the key issues, giving us an invaluable insight into the mood of the market and the practical issues that IFAs will have to face if polarisation is abolished.

Most of those attending the G80 agreed that depolarisation was inevitable, although there was more optimism that there could still be change in the proposals for defined-payment agreements.

What did the G80 participants think that the new world would be like?

The most pessimistic believed the IFA sector would shrink to between 5 and 10 per cent of its current size, with the rest becoming either Authorised Financial Advisers, trading pretty much as most IFAs do today or multi-ties with much more restrictive agreements guaranteeing levels of business to a small group of providers.

The viability of the Authorised Financial Adviser option was questioned by many IFAs. In discussion, they felt that although superficially it was the most attractive option for most advisers, commercial pressures would lead to AFAs gradually becoming “multi-ties”, dealing with far fewer product providers than they do today.

AFA status was seen as a transitional phase during which firms might reorganise their business, possibly to launch an IFA and a multi-tie arm. Product providers made it clear that in the future it will not be economic to continue with a multitude of agency agreements with small firms, thus forcing AFAs to become multi-ties by default.

AFAs and multi-ties were seen as much more likely to be offered technology, marketing and other support from the product providers in return for guaranteed levels of business.

Some of the firms which claimed to be committed to remaining independent felt they would be capable of making the transition to defined-payment agreements with an injection of outside capital. But others believed that product providers could play an important role in providing the capital needed to transform businesses that currently rely mainly on com- mission income.

Delegates pointed out that there is a big difference between minority and majority stakes.

One IFA quoted his own experience of an outside investor taking a 20 per cent stake. He said it allowed the firm to grow and to change its business mix from all commission to 50 per cent fee within 18 months. More cap-ital may also be needed for IFAs to meet future capital adequacy requirements.

The big difference between IFAs and AFAs/multi-ties was seen as the difference between giving advice and selling products. But whichever route IFAs end up choosing, there was agreement that there would be a movement away from the current “cottage industry” style of much of the market. Cost would have to be eradicated and face-to-face contact might be have to be minimised to a small segment of high-value clients.

Those that remain IFAs would have to transform into advice firms – emphasising ongoing relationships and moving away from transactions. These new-style IFAs will need IT to support the switch and will have to become much more service and marketing-oriented.

Firms that have already started down this route pointed out that becoming more like solicitors or accountants requires a big increase in back-office staff to support the fee-earner.

With the proliferation of distribution models, some delegates felt that the term IFA could lose its halo effect although others felt it would become a more valuable brand as it became more exclusive. All agreed there would be a much greater role for brands – and that IFAs might have to surrender their local identity to be part of a bigger, national brand promoted by a network or other organisation.

One delegate summed up the dilemma faced by many advisers: “If I become a defined-payment IFA, I may lose the bottom 20 per cent of my customers but if I go multi-tie I may lose the top 20 per cent.”

One key outstanding question was whether professionals such as solicitors and accounts would be allowed by their professional bodies to introduce to AFAs as well as IFAs.

The status decision of the employee benefit consultants was seen as critical to determining the access to independent advice for many people. The proposed DPS arrangements were not seen as workable for giving independent advice in the workplace, raising the possibility that employee benefit firms will set up multi-ties for workplace advice while remaining independent for corporate pension advice and so on.

Fund supermarkets were seen as the key to success for niche investment firms in the post-CP121 market. Delegates thought it was unlikely that investment houses would have the financial resources to offer a multi-tie option other than centrally through a fund supermarket such as Cofunds, Funds Network or Skandia.

Delegates diverged on the question of whether the product providers would end up owning big chunks of distribution. Some thought they would dominate the multi-tie side, either through ownership of networks or by setting up their own operations but that they were less likely to own IFA firms. They would only take smaller, strategic stakes in IFAs.

The development of e-commerce was seen as essential in the new environment but many IFAs expressed despair at the lack of progress of current initiatives.

They wanted to see more emphasis on communication between back-office systems and on the support of existing business rather than quotes for new business.

However, they agreed that IFAs were hindering progress because they were not consistent in their requirements from product providers and technology firms. There was a proposal for a new industry group to be set up, possibly under the wing of the Association of Independent Financial Advisers, for IFAs and product providers to agree a way forward.

Some IFAs felt that far more IFA firms would look to stay independent if the FSA would agree a long transitional period on the new DPS arrangements.

One IFA detailed the problems that his firm had faced in moving his six-RI firm to fees. The firm&#39s revenues initially dropped 30 per cent. It has since achieved revenue stability and is on an exponential growth track but the transformation had been tough.

IFAs also pointed out the cultural difficulties in making changes. Although the business owners could see the need for change, it was harder to convince the RIs who are used to being remunerated by commission. Some suggested that IFA firms would have to look outside the industry for individuals willing to work as salaried advisers.

Qualifications were also deemed essential as a differentiator in the future although a big consumer education campaign was necessary if they were to have any value. There also need to be simplification so they are easier to understand.

New business models would need advisers to have different levels of qualification depending on the part of the business that they worked in. Many felt it would be difficult for advisers to justify charging fees unless they were qualified at least to AFPC level.

But others pointed out that finding suitable qualified candidates was already very difficult. New ways of recruiting graduates in particular had to be introduced.

The final session on The Way Forward asked IFAs for the questions that they wanted to put to the FSA. These included:

•What are they doing to address issues in other market sectors such as persistency, product value?

•What is the process involved in closing the savings gap?

•Why is the FSA confusing quality of advice with its cost?

•Timescales for implem-entation.

•Interaction with European directives.

•Are the FSA driving the debate or following the Treasury ?

•Why is FSA not focusing its activity on trying to resolve the problem of lack of competition in the tied market rather than interfering in the IFA market?

•Is the FSA committed to the IFA sector?

•What is the detail of the framework for DPAs?

•Will the consultative process be joined up with all the other consultation strands such as Sandler, the FSA with-profits review, etc ?

•What are the rules for cross-referral of customers from one arm to another of a firm with, say, IFA and AFA; and multi-tie and non-regulated?

•Will capital adequacy requirements be different status for IFAs and AFAs?

•What steps will the FSA take to ensure no bias where providers take a stake in IFA/ AFA/multi-tie businesses?

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