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Professional process

Continuing our focus on the RDR transition, Kevin Cannon of MGP Chartered Financial Planners discusses the changes that need to be made

In my last column I discussed the obligations on individuals. The business questions are perhaps more complex. Where do I want to be post-RDR and how do I wish to operate my business?

If you wish to remain an independent firm, you need to look at getting all advisers to Level 4 and getting the business in shape to meet the new landscape. Several areas need attention, including:

If, like my firm, you are a niche player, the new definition of independence needs to be considered. You can look at independence or restricted advice or both.
In our case, we cannot call ourselves independent as we deal only in life and pensions.
The “relevant market” definition of independent will incorporate investment, tax planning, etc, so we have now made tentative arrangement with another IFA firm to meet this need in future. This matter will need to be formalised ahead of the RDR.

Income basis
We have been moving over to fees since 1995 and, I have to admit, we still spot problems in our formats. The good news is that with each modification things do get better.
In the main, we now identify our costs on a fee basis although we do allow the client to select if any or all of our charges should be met by fee, adviser charges or a mixture of the two.

This is linked to the above and is vital when charging fees.
The process should identify what is done, who should do the work, How should it be done and how long would it normally take?
This will identify the costs to the business, so the profit margin needs to be added on top. I do remember a speaker at a seminar stressing the IFA’s profit as being an essential part of TCF. Imagine the problems if you are not around when your client needs you. You must not be afraid of profit ultimately, it is why we are all in business.
If the result is a higher cost than you might imagine, you need to consider:

  • Could some of the work be delegated from the more expensive people in the firm?
  • Could more of the work be handled via systems rather than people adding efficiency and reducing costs?
  • Does the client understand the amount of work undertaken on the particular task?
  • Is the client suitable for your firm?

In terms of understanding the overall work involved, the process should lead to a schedule being made available for the client showing what services you provide and, importantly, what services you do not provide for the charge. The charge should then make sense.
The work you do not undertake can be split into Items you can deal with but at an additional cost and/or items you do not deal with at all.
Under this format, you then have a clearly agreed format of work and costs agreed with the client.
If you have established reasonable charges and the client still balks at the charge levels, you need to think about the value of the particular client to your business.

As we started out in 1974, we have quite a task ahead of ourselves.
Read all you can about the subject and do not be afraid to ask other IFAs about how they deal with this issue.
We have started the process by establishing client definitions for each category but the whole process will take us right up to the end of next year if all goes to plan.

Capital adequacy
This could be the most difficult aspect of the RDR but perhaps the FSA’s position will ease.
Having said that, my view is that everyone needs to assume that the RDR will not change, so target the relevant level.
If you are moving towards achieving the required level, fine. If not, you will need to consider alternatives, such as joining a network if this offers suitable cover on this issue, merging with other operations, selling the business, etc.

Opportunities arising
As previously stated, there is likely to be a good deal of consolidation.
It does not matter whether you are planning to remain an IFA or leave the industry altogether, you will still need to have your firm in shape in order to attract the best price. This will include updating the firm as well as the advisers to the post-RDR levels.

An abundance of computer hardware and software systems are readily available and you need to review what you want out of your system and what you currently have.
Remember, one solution might be for you use more of the functionality of your current system.
If, like me, IT is not your speciality, defer to someone who understands the subject. Luckily, the person I defer to is already on site, so this issue is now being reviewed in the light of the RDR.

The target is to have a professional service delivered by professionally qualified advisers and trained administrators on the back of an efficient back-office system.
IFAs have had their income devised by the providers in the past rather than having something which reflects the actual work we do.
The old commission basis was strange in that it had no real correlation with the work involved. The RDR will change that but bear in mind it does not necessarily mean a lowering of income. Indeed, it might force you to earn more once you demonstrate the work you do and the value to the client that work brings.
The RDR is a great opportunity to put our house in order and I think the work we all do in the areas of process and segmentation will be fundamental to our future prosperity all funded by clients who value what we do for them, so are happy to meet the charges we make.
Finally, I have not commented on the recent events discussing the RDR in Parliament, revising the date, basis, etc, as I do not feel any major changes will arise and bearing in mind the proximity of the deadline date the planning is easier if I assume that the RDR proceeds as outlined.
If you look to recent press articles, you will be aware that more uncertainty has arisen in terms of the gap-filling model to be used. We will all have to wait for the definitive answer on this, whenever it is announced.
As individual IFA firms, we have little influence on such matters at the moment, so perhaps we can only be reactive in such issues. A strong unified voice would be ideal, enabling IFA representative bodies to express a collective opinion. We can but dream.


Roderic Rennison, Director, The Ideas Lab

As in your previous pieces, you have set out your position and the issues that you are confronting clearly and logically.
Taking each of your points in turn:

The decision to operate as independent as opposed to restricted needs careful consideration. The answer should follow from a systematic review by intermediaries of their businesses, where they have spent time considering the markets in which they want to operate, their skill sets within the firm and, most importantly, based on properly conducted research, what their existing clients want and need.

Restricted is not second best, as some intermediaries have suggested. It is more a case of being clear with clients about the services you provide and your regulatory status.

However, you should also take another look at the Made Handbook rules published in March 2010 as part of Policy Statement 10/6. If you advise on the whole of the market, you may be able to describe your business as independent.

Income basis (commission v fees) and process
As you say, the basis on which you are remunerated is linked to process or what some would describe as “cost of sales”.
What you do not mention is the use of and indeed the benefits to be derived from recording time. Time recording will deliver all the answers to the points that you have outlined under “process” and more. For example, it will enable you to identify which clients are costing you money to service compared with the commission you receive and then to negotiate for this excess to be charged. It will also enable you to configure your staff so that they are employed effectively. Put another way, it will enable you to identify which members of your team are doing work and tasks that represent a good return on their costs.
Also very importantly, time recording will enable you to demonstrate to your clients what you do and I recommend that you should review the costs of delivery and the services you provide with each of your clients at least annually. Where they currently choose to use commission to offset your fees, then it is, I suggest, very important that you set out the services you are providing and ensure that they understand the benefit and value in case commission on group pension business ceases to be paid at some date in the future.
Last, and by no means least, it will help you confirm your costs and the work undertaken where on occasion clients may dispute the level of fees they have been charged.

As you say, segmentation of your client base going back to 1974 is going to take time but it is a vital activity if you are to build your practice on sound foundations and it needs to be tackled systematically. It will also enable you to decide if certain clients could be serviced in more effective ways that reflect their needs and requirements and at the same time in ways that maintain or improve your margins.
One result might be that you agree that certain types of client will in future be serviced by particular advisers where they want to specialise and some clients may be happy to be serviced more remotely than hitherto, that is, they may require less face-to-face meetings and prefer instead to undertake more of the routine work themselves and provide you with infor-mation electronically.

Capital adequacy
This remains an outstanding aspect running alongside the RDR. Keep tabs on developments and ensure that you have adequate capital in place in good times, even if there appears to be possible slippage in the current timetable.

Having an effective IT system that enables you to run the business effectively rather than a system which in effect runs you is a pre-requisite not only to running a compliant and profitable business but one which is more valuable as a result.

Following on from the last point, at some point, many intermediaries will want to consider selling their business. Where that business is “RDR ready” which in reality is no more than being well run then logically it will be more saleable and will command a better price.
The RDR is a catalyst for change. Viewed positively, it is an opportunity for you and other intermediaries to review how they can run their practices in future in a way that delivers greater benefits to clients, employees and shareholders.
You are evidently making good progress in realising this opportunity.


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