Under the RDR proposals, it seems that only the most highly qualified advisers will be able to continue offering advice covering the full range of products available.
With the future of the middle ground of general financial advisers unclear, many of those unwilling or unable to acquire the necessary certification to become professional planners may be restricted to offering primary advice to lower-income customers.
Some claim the creation of primary advice will lead to greater consolidation and institutionalisation in the marketplace. As banks, insurers and other big institutions seek to offer primary advice, smaller IFAs looking to offer the same services will find themselves increasingly squeezed.
Burns-Anderson associate director Chris Blakely says a big proportion of the firm’s members would qualify as professional financial planners under their existing chartered or certified status but many others may have to offer primary advice if not given time to retrain.
He says: “Without a transition period, they may be forced into that direction.”
Calculis director Alex Pegley expects his firm to split across two lines providing primary and professional planning advice to customers. He views the move to primary advice as “dumbing down” but also recognises a potential business opportunity for young firms such as his own.
Pegley says: “From change always comes opportunity. A lot of the old boys will want to retire rather than retrain. That will help us to consolidate and expand our customer base.”
Ernst & Young head of insurance services Shaun Crawford says there is a question mark over how IFA firms offering primary services will survive as he believes the prudential capital requirements will make it “very economically difficult” for IFAs to adapt.
Crawford says: “It is a very costly and competitive model. You are selling low-value, lowpremium products and need to have very good training and development and compliance records in place.
“That end of the market needs to be served much better but you cannot expect IFAs to step down to that level. They just cannot make money. There has to be something different. The Government should provide some fiscal breaks or some other financial incentives for people to offer this advice.”
Deloitte insurance partner Andrew Power believes the competitive advantage that banks and insurers already exercise in this market will squeeze IFAs. He says: “It is easier for them to fund a well functioning primary advice channel than it is for many general IFAs.”
On a more positive note, Power believes the primary advice model could be a success if standards of professionalism among advisers encourage more consumers to seek primary advice. However, he warns that if the initiative fails to spur demand, individual advisers may be encouraged to join an institution, such as a bank or building society, which has the appropriate professional and compliance structure in place, rather than try to go it alone.
Power says: “Existing advisers may seek the safety of a big financial institution that can help provide the infrastructure to develop, boost or maintain higher professional standards.
“Banks and big institutions have a large number of customers and strong relationships. Clearly, mortgage margins and brokers are under pressure, so they are looking for new areas for profitable growth.”
Blakely says banks may target IFAs as they try to grow. He says: “Bancassurers have not done a very good job with distribution, so one of the easiest ways of acquiring a decent distribution capability is to buy something that already exists, such as an IFA business.”
Baronworth Investment Services director Colin Jackson says he does not feel threatened by competition from bancassurers. He says: “We pick up quite a bit of business from people who have dealt with bancassurers but our clients find us more approachable and our service far more personal.”
He admits there are clear advantages to being taken over by a big institution. “Over the long term, a bigger firm is probably the better proposition. One assumes a big organisation has a team of professionals already in place, so you can take advantage of that,” he says.
The FSA denies that it is handing the primary advice market to big institutions. At a recent Association British Insurers conference, FSA director of small firms Stephen Bland said: “Of course, we expect banks and building societies to be interested in supplying these services but this is not, as some have said, handing the market to them on a plate.”
Many in the industry disagree and Pegley believes that primary advice has been designed with these organisations specifically in mind. He says: “The FSA is headed up by guys with a bancassurer background and that is what they are trying to shoehorn everyone into. That is the way they want the advice model to go.”
Pegley is sure that smaller IFA firms can capitalise on the opportunities for consolidation without being swallowed by bigger organisations. He says: “
The IFA industry is very much a cottage industry at heart. A lot of advisers do not want to see their business pursued by megalithic enterprises, they want to see the personalised service continue, so as a point of principle they are more likely to consolidate with smaller firms.”
Jackson says he does not oppose the idea of merging with another small IFA firm but would be more likely to accept an offer from a bigger institution. He says: “The overriding factor is the size of the cheque. Two smaller IFAs merging would amount to a bigger firm in the same boat.”