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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


basis.


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


industry.


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


investment.


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


cross-selling.


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



ROBERT REID



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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