There is a famous Chinese saying “Let us live in interesting times”. Certainly these are interesting times in financial services – though for many of us very challenging too.
I will not list all the challenges as you are no doubt familiar with them by now and, whilst it will be tempting for some advisers to quit at this stage, this would be the worst possible time to do so.
Ross Perot, the US businessman, said that most people quit when they are very close to a breakthrough. That is an important thing to remember.
I see a golden age ahead for those advisers bold enough to make the transition from commission-based financial advisers to fee-based financial planners. Why? Because the professional fee-based financial planner in countries like the US has an enviable position. He's in demand, he's well paid, he's respected and his profession is one of the most sought after professions for new graduates in the country. I have even heard stories of certain financial planners who have two year waiting lists for taking on new clients. Just imagine that for a moment.
The other thing I like about countries like the US is that the power is in the hands of the distributor rather than the product provider – unlike the UK where it has historically been the other way around.
Many product providers, especially the big insurance companies, are struggling in financial services. Their investment performance has been very poor for many years, they have provided poor value for money products, many of which are failing dismally, their levels of service are at an all-time low and their management is generally appallingly bad.
Take Norwich Union as an example. It has announced 900 redundancies with the aim of making the company more efficient. It has 25 per cent of the stakeholder pension market which will be unprofitable for many years to come. Its service levels have been poor for many years too. And it has just increased premiums for critical illness insurance.
As for protection, that is getting increasingly difficult to provide for clients without loadings or declines because of “insurance companies reluctance to accept risks where there is a sniff of a possible problem”. That last comment was from a GP recently to one of my clients who was declined life and critical illness insurance. When the client queried his doctor about it, he informed him there was no medical reason why he should have been declined. Amazing, isn't it?
It is little wonder these insurance companies are increasingly resorting to external fund manager links as they rarely have funds that perform well.
As for commission, forget it. Insurance companies, stakeholder or no stakeholder, are going to keep reducing the commission to advisers until it eventually disappears.
Wait a minute, I hear you say, where would these companies be without the adviser? Why would any adviser in his right mind introduce business to these companies when there is a better alternative?
With the increasing emergence of fund supermarkets, multi-managers and wrap accounts, it seems likely that insurance companies will increasingly lose market share because often all they are providing is the wrapper anyway.
In the US, $768bn is invested in wrap accounts. Also, one of the leading manager of managers companies has 20 per cent of its $50bn under management introduced by just 0.5 per cent of US financial planners. That is telling us something. Remember, what happens in the US usually follows in the UK 10 years or more later.
Independent wrap providers who offer excellent service and an excellent product will inevitably take lots of investment business away from insurance companies.
It is the fee-based financial planner who is set to reap the rewards. However, the transition from commission to fees won't be easy. It's not just the fee charging, either. The fee-based financial planner will have to improve his knowledge and skills dramatically and be able to offer true financial planning advice to his clients.
He will also need to decide which specialist area to concentrate on because the days of the general practitioner, especially in the smaller firm, are rapidly disappearing.
On top of this training will be the cost in terms of reinventing the business, sacking old unprofitable clients who are not suitable for fees and replacing them with the right types of clients and investing heavily into the business in terms of marketing, IT, systems and procedures, the team etc. It will not be easy but I am certain the investment will reap rich rewards in all senses for both financial planner and client.
Tony Byrne is managing director at Byrne Williams