A low-charging financial market could end up splitting
the IFA community. Since the Government got involved in designing products, the prospect of stakeholder prices being applied across all financial products is seen by many IFAs as inevitable.
How advisers respond to this environment is still up for debate but the advice market could be divided in two, with one side focusing on low-cost services and the other on high-net-worth individuals.
A report by Cap Gemini Ernst & Young predicts nine out of 10 products will have a 1 per cent charge by 2003, so life offices will not be able to afford to pay big up-front commission for IFAs because they cannot recoup the revenue from product charges.
It is estimated that commission will be slashed by two-thirds in as little as two years, so how can IFAs afford to stay in this environment?
IFA Holden Meehan director Richard Hunter says the writing has been on the wall for the last year that the industry is heading in this direction. He says IFAs need to embrace the changes to survive and should already be making plans to build their businesses in different ways.
The number of mid-worth investors is increasing and, by adopting the role of wealth managers, Hunter says IFAs can steer their business towards these clients rather than continuing to look after personal pensions and other low-cost products.
IFAs offering wealth management or retirement planning services will essentially have to charge clients for this service and this is where the sensitive subject of fees comes into play.
Most IFAs already offer flexible systems for remuneration where clients can chose their preferred method of payment but the industry believes that consumers prefer to pay for advice through the contract rather than being billed separately. There is also a financial benefit for clients when commission is used to offset all fees or costs incurred by the independent adviser.
Pretty Technical partner Jo Smith says commission payments are subject to 22 per cent tax relief which comes out of the IFA's fee but if a client is invoiced separately they have to pay the whole charge with VAT added, so costs can be considerably increased. Regardless of what payment method is chosen, Smith says IFAs still need to justify the fees they are charging. She says: “We need to be accountable about what we do. It is important to be transparent so clients will understand and value what we are doing. It makes it more personal to them.”
The industry believes high-net -worth and mid-worth individuals value financial advice and are unlikely to resent paying fees as they view IFAs as a professional service in the same way as solicitors and accountants.
The onus is being placed on individuals taking more responsibility for their finances and this will increase with the introduction of lowcost products.
But if there is no commission, an IFA may have to turn to the client for remuneration and, for smaller inv estors, fees could cost more than they would have paid through commission. This could conceivably drive them into the arms of tied agents or direct companies.
This is a frustrating situation for the industry. Bringing down costs will benefit consumers but IFAs need to be paid properly for their work.
Consumers and the regulators are demanding higher standards but a 1 per cent charge does not reflect the costs of research needed to maintain a high standard of service.
RJ Temple communications manager Liz Walkington says the industry cannot keep paring costs without losing quality. She says: “Advisers could become little more than discount merchants operating on an execution basis only.”
There is plenty of business out there for the taking and there are ways that IFAs can try and reduce their costs to get their fair share of it.
M&E Network managing director Simon Hudson says IFAs need to work smarter. Regulation has meant advisers have been spending more time on paperwork and back-office admin but Hudson says these tasks can easily be dealt with by support staff and will give IFAs more free time to spend with clients and build up the business. However, the likelihood is that IFAs can only compete in this market by going for volume and providing generic advice to a mass audience rather than a one-to-one service.
E-commerce is a cost-effective tool to push the market in this direction and, according to Smith, it will require clients to take a much more hands-on app roach. Customers will start to use online facilities to deal with day-to-day queries directly with the provider and only go to IFAs for more complicated investment advice.
Admin costs can also be driven down by e-commerce but many of these savings will fall to the provider rather than the IFA. When a client requires marketing literature or key features documents, it is often easier, and certainly quicker, for IFAs to print this from the internet rather than waiting for the post.
More significant savings can be made from online applications and quotation services. IFAs are inp utting all the client data which the providers can use to automatically update their databases.
Misys IFA Services head of marketing Andrew Bedford says IFAs are working with providers to reduce costs, so why are these savings not being reflected in IFA commission levels? He says: “IFAs will use e-commerce to drive down life company costs, so reduced costs should be admin costs rather than cutting commission.”
The industry has shown it can adapt to market changes and the prospect of a low-cost environment is not seen as daunting. However, if both providers and IFAs rely on e-commerce to service this market, what will happen to people without access to the internet?
A move towards low-cost products could leave half the country without access to advice.
A low-charging financial market could end up splitting