PM: What are the main options available for older advisers?
SC: The option we see most of all is that they become owners and managers of the business. In general, it is good to have someone in the business managing it rather than trying to sell and manage. These advisers don’t need to leave industry. They just need to decide on a new role.
DS: These people can run a business development role as well. As we know, business development is often neglected through lack of time. With smaller firms, there is a grey area between fully qualified adviser and introducer and in practice it may be difficult to run an introducer type role.
The FSA will be very clear on that. But also if you have too many people involved with a client they can become unprofitable.
JB: I think in 2013, we will see a slight bubble in terms of people leaving the industry but not because of the RDR, just because people who would have gone in 2011/12 will hang on and those that would have gone in 2013/14 will go earlier. Two things will influence advisers’ decisions:
first, dealing with clients is like a drug and many advisers get an immense amount of pleasure out of it. Second, they can’t afford to stop. Many of them have been underpaid in their own business for many years hoping they could crystallise value at some point to pay for retirement and it’s not there.
JO: One of the dilemmas advisers face is whether they can transition into a more general management role.
TH: There is a greater focus on what succession looks like in small and medium-sized businesses. As part of this, some businesses are aligning with certain type of firms that they may know already. It can be quite an energising time.
PM: What changes are likely to be seen in the type of adviser businesses that exist?
JB: The shape of the practice is going to change. At the moment, you’ve got the transactional practice, which works as an inverted pyramid – lots of advisers and little support. Those businesses will increasingly have to harness technology. The pyramid will move to the right way up over time. Advisers will have to skill-match to get right person doing the right job at the right price.
SC: Most advice businesses in the UK have all the assets they will ever need – they just don’t realise where those assets are. Advisers are therefore hunters. Businesses often operate as 10 individual businesses sharing a brand and the only thing that gets consolidated is the liability.
That will change. The biggest issue for advisers is honesty about what they do. They are not fund managers or stock-pickers. They haven’t got a clue how to do it and clients don’t care about it. They don’t care who gives them the return they need as long as they get it and can live the life they want to lead.
DS: Lots of businesses I’ve talked to have tried to recruit, been through all the problems and don’t want to go down that route, but do want to grow business. They’ve decided to concentrate on a small number of very profitable advisers with a strong support team.
SC: If I have a client who wants to invest £100,000 and draw an income but not take a risk to capital, he’s really saying he wants a return of 5 per cent. As soon as say I’m an IFA, I’m going to look at 3,600 different funds because that’s what I think independence is, that’s what causes the cost and demolition of value. All you need to do is give a client a 5 per cent return and ensure it’s rebased on a monthly basis. The cost demolition is that IFAs believe they add value by looking at the whole of the market place.
TH: We have an industry that is saying that it has to move from transactional to fees without saying what could we be or what should we be. An adviser may have always flogged active funds because that’s where they get a nice commission and trail, but going forward they will need an investment and due diligence process that will support their selection. They need a massive governance budget and they don’t have the skillset or the time to pick those funds. On the other hand, if you say that it’s about relationship management, you could go down a passive route and all that time and energy can be devoted to relationship management.
GK: Initially everyone thought they wanted to be independent but now it’s changing. Past models can be run under restricted advice. But people are still talking about shifting an old model – they are reacting rather than thinking about what the client really wants. If we have a truly relationship-centred philosophy, we give clients something they are excited about. How do we make that case to the consumer?
TH: We do an exercise with clients, where we encourage them to look beyond year one and transition to year six. We ask them to imagine a client is handing over £10,000 and explain what they have done to earn that money. Until you’re thinking like this, you haven’t got your proposition sorted.
PM: How will restricted advice look? And will more advisers take that option?
SC: I don’t think it’s restricted advice. When we set up Thinc, I said that there wasn’t any difference between the tied and independent side, it’s just that the product selection on the independent side was wider. The industry is set up to think IFAs are better but there is one reason people do business – it’s that they trust the person they are dealing with. It does n0t matter what it says on the card. Most IFAs were tied at one point but I bet they have still got their best clients who have stayed with them through everything. Whole restricted versus independent is a red herring.
TH: There is an economic value in independence. Advisers can be independent in quite a restricted way. I can say I want to be passive and FSA made allowances for excluding certain products in a strategic way, getting rid of hedge funds or structured products and just have a good passive offering.
JO: The irony is that restricted is a very broad church within which you have today’s IFA, today’s tied and multi-tied. Whole of market is a new thing, quite a rarified thing, driven by dogma. I think there will be changes once commercial reality sets in.
PM: Is the consumer attracted to independence?
JB: They think it means that you’re not owned by the Pru. It has been heavily debated and many have concluded that there’s not a lot of economic value in independence.
JO: It’s about what value you give to the client. In a few years, this will look like an arcane debate.
PM: Do you have a sense of the number of advisers that will go independent?
JO: It is very difficult to model. We have talked to private banks who are also saying they don’t need every product.
SC: It’s like the idea that communism and fascism are the same thing. At the “bottom” end you’ve got advisers tied to life companies. Then you’ve got IFA sector, which said they were better because they were whole of market. People with real money went to Goldman Sachs, UBS and, guess what, they were all tied
RH: But with the private banks, a section of their client base is very dissatisfied with what’s been going on. A lot of my clients are competing with Goldman or Coutts and winning that business because they are independent, because clients know they’ve had their portfolios stuffed full of hedge funds they didn’t understand. Clients are saying that they want someone who they can trust, who is independent and who is transparent, who is my advocate. Advisers have won significant amounts of business against those key names.
JO: Lots of advisers we’re talking to are doing all the right things – reviewing their proposition, segmenting their clients and then reaching the conclusion that for the top-end it probably is whole of market, probably discretionary – and the next segment down will have model portfolios and a bit more automation and then it will be an online Hargreaves Lansdown-style solution for the mass-affluent.
SC: Systems are important. Someone has to be able to replicate that service after the adviser’s not there.
GK: This is the relationship piece. The structure of investments and how they are delivered is what we understand, it’s not always what the consumer understands. When they come in, many clients don’t know what they want. We are the experts on money. They have life goals. One of the things we have failed to do in industry is to really think it through from the consumer side. The consumer does not want to be communicated with, they want to be listened to and understood and then they want financial architecture to be put in place that really sells them on the life they want to live. I think there are still things you can do that are really with people’s dreams that can make a tremendous difference.
JB: But to build capital value you need consistency of consumer experience. A lot of what you’re saying about life planning is right – people want to be listened to, they don’t want to talk about pensions but there is a problem with consistency. For me to do my job as a life planner, you have to let me in, fears, aspirations. If you let me in, I am destroying capital value because if you let me in and I go and work for someone else, you won’t let the next guy in.
SC: I agree. The first thing I do when I’m looking to buy a business is speak to a number of the clients. If the adviser relationship is the value of the business, I walk away.
GK: But you have an assumption that life planning is idiosyncratic to a particular client to a particular adviser but great life planning is a structured interview process. It’s trainable, it’s scaleable, it’s saleable. It builds value because of the stickiness of the trust relationship.
SC: The issue here is that most advisers are transient, so they will change companies based on ownership and recruitment activity. You can end up funding growth in someone’s client base and then the trust is so high in that one individual that you’re susceptible to breakaways.
GK: That’s true but methodology can move.
TH: This is where the pyramid structure is very important. If you are using paraplanners to deliver some of the service to clients, it is the firm that’s delivering not the individual. In the firms I deal with, there are often four or five people in a firm who have some degree of client contact.
SC: The reason for that is that is that advice has been transactional. Each adviser needs to keep his clients to himself so he can carry on selling products to them. If everyone’s service-led and fee-based, it shouldn’t matter who runs the funds. But it does make a difference to the remuneration basis of the adviser.
Round table participants
Paul McMillan Editor, Money Marketing
John Baxter Veracity Asset Management
Simon Chamberlain Succession
Tim Hale Albion Strategic
George Kinder Kinder Institute
Jeremy Oakley KPMG
David Shelton Scottish Widows and author of The Business of Advice