How can you ride the transition from an
up-front commission basis to a scraping-the-barrel scenario?
With the potential for a
further eight million customers as a result of the Government's announcement on concurrence, more and more IFAs can visualise the need to advise the generic public on pensions as opposed to concentrating efforts on targeted clients.
It is hard to compromise your professional image, and ultimately lifeline, by turning away clients. Many clients do not understand commission and understand even less the impact on their adviser's business of severely reduced remuneration in the long term.
But the market has already started to change. In the corporate pension market, around 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 advisers. They are, you could say, already starting to embrace the New World. The question is, how long it will 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 commission and higher returns. Trail commission, for example, which is known over here as fund-based renewal commission, now accounts for a big proportion of IFA remuneration. As a result, it is not uncommon for a firm to have A$65m under management.
The IFA profession in Australia has taken a huge leap towards the reputation which is usually associated with solicitors and accountants. There is a huge influx of graduate trainee programmes in the financial services industry in Australia. Building up a professional, profitable practice
is commonplace and many practices attract a lot of interest on sale. This has not happened overnight and, in the UK, I believe we too can adapt and change with the market.
This can be achieved by adapting a four-step approach.
Analyse your business as an entity.
Establish who are your most valuable clients 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 waste time. Having analysed the business closely, what small changes can be made to make the business more effective?
The next question is who are your most valuable customers and why do they buy? This leads us 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, for example. 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 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 the stakeholder market.
This leads us to the next step – creating a long-term financial strategy for success.
An former 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 the basis of 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 fund-based renewal commission income stream, this generates £60,000 a year for very little work. It frees him up not only to develop 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 time he will have in excess of £50m under management. On 0.5 per cent fund-based renewal commission, this will generate £250,000 a year. It is all about long-term strategy.
So finally, how can stakeholder benefit the adviser market? Well, for a start, there is the opportunity to take fund-based renewal commission within stakeholder. This alone could be the goal. All stakeholder clients can be set up as the long-term investment arm of the business.
Second, 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 directors, 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 remun-
eration potential it presents, we cannot go far wrong.
How can you ride the transition from an