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Map out the changing course

The product price in any industry is a key part of the buying decision but it is only one part of the decision-making process and people are sometimes prepared to pay more for a product because it exactly matches their individual requirement and the value on offer.

The same principle should apply to financial products but our industry has sometimes been guilty of focusing too much on price.

This is missing the point. The key is that the client gets the right product to meet their investment needs.

If they have a Sipp but only require investment in several mutual funds, then they may have the wrong product and may be paying too much for it.

This is ultimately a suitability issue, not a price issue. If an investor is using the full investment flexibility of a Sipp, they will pay more for that flexibility. Price will typically increase in line with investment sophistication.

The retail distribution review is causing much debate regarding the future of the advisory landscape.

One point that has been made crystal clear in the RDR interim paper is the end goal – to achieve the best possible outcome for the consumerThat is why it is now more important than ever for an adviser to demonstrate effectively the value of advice to each client and show how long-term benefits are available to those prepared to pay for quality products and comprehensive advice.

In financial services, just as in any industry, you tend to get what you pay for.

The Retirement Monitor 2007, a study into consumer attitudes to retirement planning, tells us that, of those surveyed, 37 per cent are prepared to pay up front for advice.

The study also confirms that independent financial advisers are the preferred source of advice for retirement planning and so clients should be open to discussions on fees and charges.

Explaining the relationship between the price of the product/advice and the sophistication of the product/advice can be a good place to start.

Pension wrappers can help illustrate this relation-ship. When determining the type of pension wrapper suitable for an investor the degree of sophistication and control that is required is a significant consideration.

Pensions can be broadly categorised into three main groups according to their degree of investment sophistication.

At the basic level, a stakeholder pension, which has a price cap on charges, would typically provide access to a very limited range of funds. At the next level, some personal pensions can provide access to hundreds of funds which will be more than enough for many people investing in pensions.

At the highest level, high-end Sipps provide even more sophisticated and flexible investment choices.

A stakeholder pension could be the cheapest option for a client but the investment potential for this basic wrapper may be hampered by the limited investment choice and flexibility available.

Multi-manager and Sipp solutions are now thought of as mainstream and this indicates that advisers feel their clients could be better served by a personal pension or Sipp wrapper.

It is understandable that an adviser is able to easily see the benefit of paying for wider fund choice and ongoing flexibility and so should be able to demonstrate this confidently to a client.

As a pension is usually a long-term investment, it is going to have a far better chance at meeting the client’s objectives if it is nurtured and tended over the years.

Technology is making it easier for advisers to review and track a client’s portfolio but although online functionality undoubtedly streamlines the review process, it is still the adviser’s expertise that is of most value to the client.

This expertise allows advisers to interpret portfolio movements and recommendations are made as a result.

It stands to reason that no client could expect to benefit from this expertise year in and year out, yet pay nothing for it.

Cost is likely to rise in line with the sophistication of the wrapper selected and so a rise should also be expected in line with the quality and regularity of the advice being given.

In its dedication to achieving the end goal of consumer satisfaction, the FSA has recognised that building greater consumer confidence is part of the role of an adviser. To this end there is a desire to ensure that sales are not made on the basis of the commission levels available.

With this focus, advisers are wise to pay greater attention to how they are remunerated and whether or not this should change going forward.

An adviser deserves payment for his or her expertise. Customer agreed remuneration will see gravitation towards fees. This is a natural and ongoing market evolution in this decade.

Essentially, the FSA is aiming to make sure that in financial services a client will get what they pay for.

For instance, an adviser choosing to take trail commission should then be able to demonstrate regular activity on behalf of the client that justifies this cost. This principle effectively illustrates the price/sophistication relationship. The trail commission is the cost required to ensure sophisticated advice and expertise is consistently applied to the client’s retirement strategy.

As always, at the heart of any recommendation made by an adviser is suitability.

For some, a stakeholder plan may be the most suitable recommendation but, for others, wider fund choice and flexibility will be a better fit.

What is certain is that the initial recommendations made following the first client review may no longer be as suitable a few years down the line.

A client’s appetite for risk or their personal circumstances may change. It is possible that a client who was initially best suited to a stakeholder plan is going to be better off with a more sophisticated solution a few years later.

Only by regularly reviewing a client’s aims, their attitude to risk and their personal circumstances can an adviser be sure that the right investments are being made into the right wrapper.

In addition, the market also continually evolves with new products, services and funds becoming available. It is possible that a product that is new to the market could be better suited to a client than the initial recommendation.

Regardless of the wrapper selected, the single biggest determinant of how much a pension will be worth in retirement is the performance of the underlying investments.

In today’s dynamic market, a pension needs to be regularly reviewed and serviced. A suitable recommendation coupled with a well thought out strategy and regular reviews creates the best environment for achieving the best possible outcome for the client.

Advisers who can market these valuable services effectively to existing and potential clients will be well placed to succeed in the changing financial landscape which is an outcome that is well worth paying for.


Restricted view

Restrictions which intend to protect businesses after an employee leaves or an agency agreement ends feature heavily in the financial services world. However, there is a lot of disagreement and misunderstanding about how enforceable these restrictions are.


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