The countdown to the RDR is well underway and it is clear that the regulator is not minded to delay its implementation. Despite the need for action, some firms’ principals have misconceptions that could put the transition process in jeopardy. This article highlights the ones we have found the most common in our travels and how they can be effectively addressed.
1. We have been fee based for years
Fee based advice is not the same as commission offset or trail commission. There will still be a need for advisers to agree adviser charges with their clients and importantly to demonstrate the value of their advice and services. Those advisers who don’t plan for the changes and cannot clearly articulate their propositions, risk significant disruption and reductions in their income flow.
2. We don’t need to record our time: we know our costs
This is not borne out by research. Only a minority of intermediaries can accurately and easily identify the costs of advising and transacting different types of case, and even fewer know what the breakdown of cost is between different team members. Only by recording the time spend by all staff – not just advisers – on advising and transacting cases, can intermediaries know where the inefficiencies lie. Time recording also enables queries on charges from clients and providers (when claiming for maladministration) to be answered easily and effectively.
3. We know our clients so we don’t need to research what they value
Again, research does not bear this out. The challenges that some intermediaries are facing in moving from commissions to Adviser Charging are compounded by finding that some of their clients – often the most valuable ones – do not value all the services that they are being offered. If there is clarity around what clients do and do not want and value, those elements of the advice process that are less valued can be delivered in ways that minimize the cost.
4. My clients won’t pay “pure” fees so I am going to take adviser charges from either the funds that my clients invest in or from a platform
There is one important flaw with that approach; suppose the client doesn’t actually need any investment products or the value of the underlying investments fall for a period? In first instance, the inability to charge any fee is problematic and in the second the intermediary’s income will reduce. If the value and importance of the services being offered are clearly set out, then clients will find it easier to see the benefit of paying fees and be more likely to accept them.
5. Segmentation is easy: I only need to know the size of their assets
Using a single criterion could be a mistake and lead to problems. For example, what about clients who have the likelihood of becoming wealthier whether by career advancement or inheritance? Also what about those clients who are in a position to refer wealthy individuals and what about connected family members who may not be wealthy but need to be advised to preserve other relationships? Only a measured and systematic approach to determining the clients that are the ones to focus on will yield the right results. That will require as many as five criteria to adequately perform the segmentation.
6. I have left the work to others to do; I will simply change at the sound of the bells on the 31 December 2012.
Delegating or rather abdicating can often have unintended results. Also, failing to include all the people in a firm can lead to resentment and also a lack of understanding about the need for change. Everyone should participate in some degree and the owners/directors should be seen to lead the process to demonstrate the importance attaching to the process of change.
Knowing when to seek assistance
If firms are to transition their businesses effectively, recognising when they need to obtain assistance to help them achieve their objectives is paramount. Seeking out assistance is not a weakness; it is a strength.
The RDR and the changes it brings will be a challenge for the majority of intermediaries. Without doubt, it is those firms who have approached the process systematically and without misconceptions and preconceptions who are significantly more likely to succeed. This is the time to outsource those key tasks that have to be completed to ensure a successful transition. It is clear that many firms simply don’t have the time to manage this change and keep income coming into their business.
A successful transition project involves auditing progress at regular intervals, when this is combined with the methodology we have developed for firms to identify weaknesses and shortfalls; the necessary adjustments can be made to ensure their propositions are robust and deliverable, essential if they are to succeed.
Roderic Rennison is a director of the Ideas Lab