In a multi-tied environment, IFAs would need to decide what their core business really is. Do they offer ongoing advice using financial plans which are reviewed and updated on a regular basis or do they offer one-off advice paid for by commission or fees linked to the transaction? Or do they act as an independent distributor of financial products, for example, a discount broker?
Historically, too many IFAs have relied on the commission generated from the charges within the products they recommend to their clients. Consequently, they have been lazy in explaining their added-value proposition to the client. This is a luxury they can no longer afford.
Before beginning a fact-find, an IFA must spell out their added-value proposition to the potential client, agree the value of this proposition and establish the manner in which this service will be paid for. If an IFA offers to give away their service for “free”, they are telling the potential client that their service is without value.
The discount broker's proposition is different, being based on price, not the suitability of the product or personal service.
In a multi-tied environment, it is even more important to understand what an IFA's clients actually value. Is it the financial plan? Is it the ability to discuss alternative options? Or is it having the hassle of admin taken out of their hands? Many clients may find it difficult to put into words how they benefit from the service offered by their IFA. It is for this reason that the IFA must establish added value early in the client relationship and re-establish the benefit on a regular basis.
One of the fundamental changes within a multi-tied environment is the shift in focus from acting on the client's behalf to acting as the distributor of one or more product providers. A key benefit of a competent IFA is their ability to act as a professional buying counter-party to the product manufacturer. In a multi-tied environment, this counter-party service is lost.
From research that has been conducted, it is clear that most IFA clients see no ben-efit in the multi-tie concept as the IFA moves away from acting on their behalf and limits the range of products available. Moreover, this concept assumes that the solutions adopted for the different financial circumstances are always product-orientated.
Yet the multi-tie concept appeals to policyholders who prefer to purchase financial products from a single manufacturer, as it could introduce them to a greater range of choice.
It could be argued that IFAs to a very large extent could ignore the introduction of multi-ties as long as they continue to establish and remind their clients of the benefits of their service. The main caveat to this point of view will be the actions of our regulators. In the event of regulatory failure or misjudgement, Governments and regulators do not like to suffer the financial consequences of their decisions or actions. The UK system transfers the financial cost back to the industry via the Investors' Compensation Scheme, the Policyholders Protection Board and, for tied and multi-tied organisations, the sponsoring product provider. This system means the regulators cannot rely on a rich sugar daddy being available for IFAs, so it is possible that regulation of IFAs may be tougher than for multi-tied advisers.
Certain pressure groups are pushing the concept of safe-haven products, for example, Catmarked products, not understanding that the problem of missales and mispurchases has rarely been that the product is not suitable for its purpose but that the product is not suitable for the person who purchased it.
IFAs' main actions to prepare for multi-ties should be:
To ask clients to pay fees (with commission offset if tax-efficient), both on a retainer basis and for individual transactions.
To establish and to continue to remind clients of their added-value proposition.
To continue to offer those services to their clients which have been the basis of their successful business in the past and which should continue to be the basis of their success in the future.
To deliver the service that customers want and not what regulators, politicians, consumerists or product manufacturers want.
CHARLES LEVETTSCRIVENER Director, Towry Law