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Four-step approach to emulate wizards of Oz

With the potential for a further eight million new customers as a result

of the Gov- ernment&#39s 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&#39 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

under management.

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

for success.

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&#39s 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&#39m

confused. Isn&#39t 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


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