With the potential for a further eight million new customers as a result
of the Gov- ernment's announcement on concurrence, more and more advisers
can visualise the need to advise the generic public as opposed to
concentrating efforts on targeted clients.
It is hard to compromise your professional image, and ultimately lifeline,
by turning clients away. Many clients do not understand commission and
understand even less the impact on their advisers' business, which is
severely reduced remuneration in the long term.
But the market has already started to change. In the corporate pension
market, about 10 per cent of adviser firms now operate at least in part on
a nil-commission/fee basis. Another 5 per cent take a flat rate. A further
25 per cent are setting up new schemes on a reduced Lautro commission
This is a natural shift in attitude by the adviser market. They are, you
could say, already starting to embrace the New World. The ques-tion is, how
long will it take before these statistics increase dramatically?
If we take a look at what happened in Australia, where the IFA community
was faced with a similar situation, over a period of nine years, the market
has gone from high commission and lower returns to lower commissions and
higher returns. Trail, for example, which is known over here as fund-based
renewal commission, accounts for a large proportion of IFA remuneration. As
a result, it is not uncommon for an adviser firm to have A$65m dollars
The profession of an IFA in Australia has taken a huge leap towards what
is usually associated with solicitors and accountants. There is a huge
influx of graduate trainee programmes there in the financial services
Building up a professional, profitable practice is common- place and many
practices attract a lot of interest on sale. This has not happened over-
night and in the UK I believe we too can adapt and change with the market.
So, how can this be achieved? You need to adopt a four-step approach:
Analyse your business as an entity.
Establish who your most valuable clients are and why they buy.
Create a long-term financial strategy for success.
Decide how stakeholder fits into your business and how you can make it
work for you.
The first step is to take a long, hard look at your business. Ask some of
the less obvious questions to steer yourself towards a focused approach:
How does my business operate on a daily basis?
How many staff do I employ or need to employ?
What tasks do I carry out that a less qualified person could undertake?
What is the average return on real time?
When am I most effective and why?
What do I do when things do not go according to plan?
What could I do more effectively and how can this be achieved?
Within a stakeholder environment time becomes extremely valuable. It could
be very easy to fritter it away. Having analysed the business closely,
what small changes can be made to make the business more effective?
Identifying your most valuable customers and their motives for buying can
lead you into potential markets. A customer does not only buy an
income-drawdown plan. The typical profile of this client is socially an
AB. Hence the income-drawdown plan is not his or her most valued
However, their most valued investment may not be liquid such as their
house. But if this is their most valued investment, what steps have they
taken to ensure they get the best returns?
For example, have they renewed the cladding over the last five years? If
not, you can recommend a tradesman to assist. This tradesman is just one of
the business partners you have begun to establish in order to diversify
your income stream. This is a very simple way of explaining the concept of
In the realms of the corporate client, cross-selling becomes much more
valuable and is commonly known as worksite marketing. Here, the potential
is vast and it is the development of worksite marketing that will ensure
survival of the fittest in a stake- holder market.
This leads us into step three – creating a long-term financial strategy
An ex-colleague of mine is now an IFA among other things, which is another
reason he is successful. He started from scratch about three years ago with
no client bank and no corporate contacts.
In this situation, the gut reaction may have been to see as many potential
clients as possible. He did not. He only saw those potential clients he
considered to be a long-term investment. Every client was advised on
fund-based renewal commission only. He saw 30 clients in year one. After
three years, he has £12m under management.
On a 0.5 per cent FBRC income stream, this generates £60,000 a year
for very little work. It frees him up to develop not only future clients to
add to his funds under management but also to continue to build the
training and marketing arm of his business.
Assuming all goes to plan, in seven years, he will have in excess of
£50m under management. On a 0.5 per cent FBRC, this will generate
£250,000 a year. It's all about long-term strategy.
So, how can stakeholder benefit the adviser market? Well, for a start,
there is the opportunity to take FBRC within stakeholder. This alone could
be the goal. All stakeholder clients can be set up as the long-term
investment arm of the business.
In addition, stakeholder provides the easiest way to break into the
corporate market. Every employer needs advice – especially those with an
existing pension scheme. Auditing schemes is one way in and charging a
flat fee of £250 per audit is acceptable.
Various financial needs will undoubtedly arise from the audit, such as a
scheme restructure, a more modern executive plan for the dir-ectors,
individual advice for the employees and e-commerce advice for the company
as a whole.
Survival of the fittest is rarely handed to us on a plate. But as long as
we take a long-term view of the future stakeholder market and the rem-
uneration potential it presents, we cannot go far wrong.
David Tildesley, Sales and marketing director, NPI
Bacon & Woodrow illustrated in a recent article that, even in the cases
where other areas were the principal focus for IFAs, pensions remained a
significant proportion of the business placed with traditional providers.
By limiting the charge on stakeholder to 1 per cent, the Government has
very neatly taken a giant leap towards removing front-end charges for all
products. I regularly hear of companies offering 1 per cent-style pension
plans but with 30-80 per cent of Lautro commission terms. This means one of
two things. Either companies are confident of buying market share or they
are convinced these plans will run the majority of their full-term.
Rather than consider these strategies from within, let us consider how
clients will react once they are aware of what is going on. One of my
clients recently had a visit from their accountant who was accompanied by
an IFA consultant from a provider which I will refer to as Scottish
Miscellaneous. The consultant explained the stakeholder concept and in
particular the 1 per cent cap on charges.
The accountant was asked what he would earn from the setting-up of the
scheme and informed the client that he was not taking an upfront commission
but 4 per cent level commission. At this point, my client said: “I'm
confused. Isn't it the other way round, with commission at 1 per cent and
the charges at 4 per cent?” “No” they chorused. This was all too much for
him and he suggested that the meeting had reached its natural conclusion.
As he helped them to leave, he explained that as a businessman he never
dealt with companies which took such a cavalier approach.
I fully support his comments. With every provider telling me they need 15
per cent of the market to break even and 20-25 per cent to make a profit,
from my maths, that leaves space for 4-6 providers long-term. So what of
the providers which pull out of the market later? Will we see a re-run of
the situation of Crown Life, where marketing triumphed over servicing and
led to the demise of that provider? I suspect we will and that will leave
the IFA to pick up the pieces yet again.
There has never been a better opportunity for the professional adviser to
stop selling products and sell advice. The introduction of fund
supermarkets is not the end, it is the beginning of a new market where IFAs
will give advice but leave the unprofitable element of product purchase to
the client and a third party, for example, the fund supermarket.
From a regulatory standpoint, this would be unwelcome as the regulator is
product-led but this should not be our concern. Regulation is, after all,
for the benefit of the public, not the regulator itself. We need to
consider this now and we take the first step to promoting the value of
professional advice by banning the use of the highly misleading term “free
advice”. There is no such thing – someone has to pay.
Just as with stakeholder, where it is the shareholders of many of these
companies who will ultimately pay for the current approach of buying
business, only to see their target market share unfulfilled and/or the
schemes move to a provider offering lower level of charges. By selling on
price, you are dealing in a commodity. We should never make the same
mistake with the sale of professional advice.
Start today by asking yourself what do we do for the client that they
cannot do for themselves. In the information age, people will be better
informed or in many cases confused at a higher level. Whichever state they
are in, it is our client who will be our main competitor in the future and
we must recognise this and build our businesses accordingly.
Robert Reid is an IFA with Syndaxi Financial Planning and Sofa spokesman