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Outside edge

While happy to point that out that last time I wrote on this topic I did not feel that a defined-payment system climbdown was likely, I would not necessarily be jumping for joy at the apparent change in tack.

Despite the news that the FSA is set to relax the rules on DPS, there seems little doubt that greater transparency will still be sought by the regulator.

It seems to me that the strong drive of the regulator is toward a value-based business model. One of the steps on this journey is to allow consumers to understand the cost of the advice they receive in the hope that they make a value judgement on the provider of that advice, or even between different advisers. All very laudable and I guess whatever emerges will be progress from the well hidden paragraph on page six of the key features.

What may be more interesting is the impact on life offices and asset managers once their cost of production comes under scrutiny. I cannot help but feel that the former at least has a lot more to be worried about. But that is a different story.

Whatever payment method is adopted, it is certain that consumer awareness of the cost of advice will improve. This is likely to mean that there will generally be a rise in the standard of advice or a fall in the level of remuneration for IFAs. Either way, it may not be an easy road for the entire community. Neither is it clear which approach is most likely to prevail.

My feeling is that the IFA market will polarise (if you will) into highly professional advisers who can command a premium rate for providing in-depth analysis and advice on a client&#39s affairs and a group of less proficient firms more intent on pushing certain products to the public.

The first group is already, and will continue to be massively successful because they are clearly adding something of great value to their clients. In my view, their share of the cake is likely to rise as it is this group that is entirely in control of the client and crucially the assets under management. It seems absurd to me that the valuation multiples applied to these firms are considerably lower than for asset management groups, which, after all, are generally managing transient money. It may be that this anomaly is based on historic attitudes rather than fundamental beliefs but it nevertheless persists today. It is this group that will prosper and will enjoy increasing success, particularly where they can gain some kind of scale without diluting their customer proposition.

The second group, on the other hand, and largely the group in which the big life providers have taken stakes, will find their proposition increasingly commoditised and under threat from discounters and other channels such as the banks. In the same way that pseudo professional services such as conveyancing have come to be charged on a fixed fee basis, it is easy to see very mainstream investment products such as this or that year&#39s Isa being similarly charged. It is difficult to see any value emerging from this group expect perhaps where there is massive scale – and even then it is improbable that such scale will exceed that of the high street brands.

I guess there will also continue to be a middle ground which will continue to offer a decent level of fee for a service that is perceived to be pitched between these two extremes but it is likely that this group will be a dwindling band.

Anyway, who knows? The only certainty is that those businesses that fail to add anything will be squeezed out. In a 1 per cent world, DPS or no DPS, there is no room for passengers. Furthermore just having a ticket will not be sufficient to ensure you last the journey.

David Ferguson is a director of The Abacus consultancy


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