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Model partnership

In two previous articles I have highlighted some of the reasons why so-called wealth management models have struggled to deliver a result and also offered my thoughts as to some of the necessary ingredients for a successful model. I now wish to explore how we may best be able to get the right leverage in place to drive a viable new model.

For those organisations already owning a national brand – or those aspiring to own one – delivering increased productivity has always been the ultimate challenge. The economics of most large providers depend on seeking progressive improvement in this area coupled, of course, to attacking the fixed costs associated with distribution.

While IFA fixed costs are invariably lower as a percentage of the total, progressive reduction in commission levels will inevitably create the same requirement for increased volume. The by-products of the various industry reviews will also add to this pressure and future operating models will inevitably demand higher productivity, largely based on the high-net-worth end of the market.

With so many business models needing to adjust or change – and we know that change always results in an initial negative disturbance factor – adviser and management competence is likely to be tested to the full. This raises critical issues of control and culture.

So what can organisations do to mitigate against some of these pressures? For a start, infrastructure is going to be critical. Different distribution channels will have no choice but to work in a way that directs lower value and simple solutions towards remote execution. Those responsible for relationship management will simply have to recognise this.

The issue of customer ownership therefore arises yet again. While some models have the organisation driving this, the majority still assume that the adviser is – in reality – in control.

For those of us who believe personal relationships to be key, we have to find a way of balancing the chemistry of the contact with the reality of the economics. Equitable Life had an excellent approach to multi-channel transactions and organisations such as Standard Life strive to maximise the potential for remote transaction without disturbing the relationship.

Remuneration schemes will be critical in helping to solve this dilemma. The traditional commission systems operating in larger IFAs – and still in some tied operations – may now have to incorporate a gearing that encourages not only a client&#39s best interests but also economic reality.

The shape of remuneration schemes becomes pivotal in this environment. This has long been accepted within most tied sales teams but hardly at all in the intermediary sector. Commission may well be the way a provider rewards the distributor but it may be time to radically rethink how this reaches the adviser.

The opposing view will claim that top advisers will always chase the highest possible reward opportunity – and anyway this is the way in which the industry is structured. Well, good advisers do work in tied environments and an industry in crisis may just need to introduce a very new way of thinking.

A further critical ingredient is the creation of the environment that – even in a highly regulated market – can foster entrepreneurial behaviours. Self-employment, in either an IFA model or as part of a tied organisation, has always been the traditional way of achieving this.

However, in other industries, franchising has long been established as a way of providing the balance between the need for a controlled proposition and the desire to deliver “business owner” behaviours.

Zurich Life has effectively been the only scale player to favour this dynamic. Given the likely future scenario, they may be well placed to lever significant advantage over key competitors. It is perhaps surprising that others have not followed at least the principle of the franchise model.

A future necessity must be to avoid new regulatory risk as a result of ever greater pressure on staff to deliver high productivity. Clearly, a move to high-net-worth markets helps this cause and the prime driver for productivity improvement really should be case size. But this also brings new challenges in requiring both improved technical competence and better developed “social” skills.

We perhaps need to look again at the whole area of how the customer pays. From the debate that rages, one would assume that there are only two choices – commission or fees. And fees can only be associated with independent advice.

But for many products, consumers are quite happy to pay for quality service. Many of us are used to paying service contracts for gas boilers, care of property and access to a variety of professional services.

We have also seen – from financial service franchise models outside the UK – that guarantees of regular service, regular access to and delivery of trusted advice, ease of data access and assurances on quality standards can deliver tangible value to many clients – particularly if presented by professional advisers backed by quality brands.

The generation of a significant service-related revenue stream from a core group of clients can not only be attractive in its own right but also reduces the pressures to maintain remuneration levels via entirely transaction-based activity.

What better time to consider such initiatives than when the industry is about to be turned on its head? When a significant reduction in shopfronts is anticipated, this may just be the time to take a new lead.

Taking this theme further, there are undoubtedly a significant number of well-qualified and highly principled advisers pondering their future in the industry. They believe in the principles of the relationship but are concerned about how the sector will respond.

The opportunity for tied and independent operators alike to create new brands of excitement and innovation is clearly there. Those with courage and vision will be the winners.

Brands that genuinely adopt the principles of a “trusted partner” – both for the client and the adviser – and that show a demonstrable conviction in the future, will have a headstart. Those that display caution, lack of clarity or uncertainty or insist on regurgitating past models may just be sealing their own fate.


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