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Generic code

Which? and IFAs make unusual bedfellows. The fact that they have both condemned the ABI’s proposals to the FSA on distribution has to be seen as further evidence of quite how much the trade body has lost the plot.

Because of an earlier copy deadline necessitated by a bank holiday, my last column was written on the basis of the draft ABI document exposed by Money Marketing. Some of the most obviously flawed proposals have been eliminated in the final submission but the finished proposals still display a lack of understanding of the dynamics of the marketplace.

Others have already documented the failings of the final submission so I am not going to examine it point by point but I would like to focus on one area and demonstrate how the ABI might have approached what is a serious challenge to the market in a far more constructive way.

There is a clear need for consumers to get more advice on investment products. Twenty years of moving to an increasingly regulated market with specific requirements for professional qualifications and training and competence has driven up the cost of delivering advice, especially face-toface advice.

If the true cost of meeting the regulator’s obligations is extracted from the product on a regular basis, either by commission or fees, the cost of the service will have a detrimental effect on the overall performance of the investments if the client is not in the high-net-worth category.

Apparently, the ABI’s answer to this is to remove the adviser from the process and allow the provider to deliver a service. I would like to understand how the provider will capture all the knowledge on the client’s existing circumstances and other investments and arrive at a holistic financial picture of the consumer’s affairs so that the individual investment that the provider is delivering can be seen in the context of the client’s wider situation.

Assuming that IFAs are not going to suddenly start only recommending the products of a single provider to each client to make post-sale servicing easier for the provider, unless ongoing suitability is to be completely ignored, presumably there will be a massive level of duplication as multiple providers all seek to carry out the same suitability analysis for the same consumer.

You do not have to be a rocket scientist to realise that the ABI is again simply putting forward self-serving ideas that will tilt the playing field vastly in its members’ favour, with scant regard for consumers’ needs.

The ABI is again trying to solve the wrong problem, resulting ironically in a solution which if adopted would almost certainly increase costs for their members rather than reduce them. It is the cost of providing advice rather than who is giving it that is the problem.

Human contact is expensive to maintain. Qualified staff, whoever employs them, cost money to train and maintain. Physical meetings require travelling time which is frequently an inefficient use of resources. What we need to find are low-cost ways of providing consumers with the information and guidance they need at a price they can afford.

Important work along these lines is already being carried out with the development of a generic advice process although we must educate consumers and the media about the differences between the generic process and explicit advice.

I know a lot of people are concerned that the generic process needs to be labelled differently to avoid confusion among consumers, with the risk of harming the value that clients’ place on the detailed advice process.

Whatever we call the new process, the public and national press will describe the generic mechanism as a form of advice.

To address this, the industry needs to develop low-cost, information-rich processes and services that include specifics. The way asset allocation tools have evolved is an indication of how powerful services can be automated to deliver a level of analysis that is far beyond what most people could calculate manually. These tools are not suitable for use by the mass market but they do demonstrate what can be achieved by using technology and much of the infrastructure we need to supply such services already exists, even if it is not currently deployed in this way.

If face-to-face advice is only economically viable for clients with significant investments, we need to find ways of giving consumers the advice they need in ways that they can afford and where it is convenient for them.

We live in an age where almost everyone has a mobile phone, internet access is available to all but the poorest of consumers and the convergence of media services via broadband and digital television mean that in just a couple of years, there will be multiple digital pathways into nearly every home.

In designing new ways of dealing with consumers, a primary concern must be identifying which products are appropriate. If we are going to have a stripped-down regime which might involve more consumer lead purchases, there may be a strong need to protect against misbuying. Even then, there could be a need to have an industry pool to compensate in cases where the customer gets a product that is not appropriate. Perhaps we should discuss a product levy to fund this for products that are distributed using a light-touch regime.

In trying to address how to make advice affordable as well as addressing persistency, the industry must be prepared to look at models which are radically different to the traditional advice process which has evolved in the last 40 years.

I believe adviser firms have a valuable role to play in such a process although for many new customers, the way advisers will interact with them may be vastly different.

This will almost certainly necessitate significant investment in systems to power automated advice but with advice firms strengthening their balance sheets and revenue streams through recurring fees and commission income, this should be affordable.

Some consumers may only ever deal with an adviser via the automated services but this may also be a way for clients to be incubated until their wealth reaches levels where one-to-one advice becomes economically viable. I am not saying this will be easy but I believe passionately that as an industry we have the intellect and the resources to deliver such solutions.

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