Over the past year, a lot of support has been extended to advisers to help with the transition process. More advisers appear to be planning to stay in the industry. Is there a connection?
DH: Before selecting anyone to help with the process, advisers need to decide where they want to be and what they want to do. This is the first time the industry has had to look at itself and decide how to run a business with all the things that go with that. Qualifications took all the press for a long time but many advisers are now thinking about the second hurdle – business transition.
CC: There is also a danger with relying too much on external help. We saw this initially with TCF when a plethora of compliance consultants emerged. The FSA looked at these solutions and told advisers that while they had a TCF solution, it was not their TCF solution. In other words, it was too generic. There are a lot of people going round with RDR solutions but it worries me that firms will buy generic and there will be no differentiation. A commonality of solution could emerge that does not meet the FSA requirements. CC: It is all about reducing regulatory risk in your business.
The reason why restricted is becoming attractive is that it can help run a lower-risk profile business. If your proposition is to be an IFA, you have to prove you are doing search, study, comparison. That is risk.
LG: Today’s IFAs would be restricted in the new world. What muddies the definition is the number of business models within that definition – from the near-IFA right down to the extremely restricted. The report succeeds in differentiating some of those areas. Restricted advice takes less time, it might enable IFAs to continue serving sections of their client bank economically.
What opportunities are avail- able for those who get it right?
DH: There is a lot of advice out there but many of it has confused rather than helped. Clients are looking for people to help them through it and this is why an internet and web strategy can be a very good differentiator. There has been a commodisation of product, so product selection has been taken away. The big opportunities are in the life-coaching, life time cashflow modelling and financial planning sides.
AM: There are also macro factors. The Government finances are in a parlous state and there is a growing recognition that the state will be less able to provide in any number of areas.
CC: We are all living far longer lives but the history of financial services to date has been around accumulation. Some specialists emerging to target decumulation focused on the high-net-worth, mass-affluent clients. There is a huge need for that. The problem is that this generation will die. I would suggest that advisers need to have a twin strategy of decumulation and inheritance. The current business model suits the decumulation generation – it’s about personal service, financial planning, face-to-face advice. But will it be suitable for the next generation?
What is the role of technology for advisers? Is it worth worrying about a Twitter strategy when there are so many other pressing concerns?
DH: Twitter might be a bit sophisticated but a strong website will enable people to sign up to receive more information or allow them to graze on your information ready to engage with you on a paying basis. A lot of advisers are building revenue streams through subscription.
CC: It should be said that it was only five years ago that the FSA insisted that advisers do electronic returns and advisers complained to me that they would need to buy a computer. We have come a huge distance. The next challenge is to look at what other content providers are trying to do. There may come a point where advisers will bronze cli-ents to get certain information, silver another and gold another.
SF: With the introduction of adviser charging, it is more important that you are charging advisers for the things that they value. This may be the life coaching or similar. Advisers then need to use technology to deliver better efficiencies elsewhere in the business.
One of the surprising findings of the research was that restricted advice may be the most economically viable path Independence is looking expensive. How do you think this debate will develop?
DH: I don’t think my peer group have clicked onto what new independence means.
CC: There is a new definition of independent, previously it was absolutely everything. The FSA heard the message that that might be problematic and has now said that you can be narrow-cast and still be an IFA. Then they lost the courage of their convictions by introducing this concept of restricted. You can now be a panel IFA as long as it is a “relevant” market. You can say that on a review of your current client base, you can exclude, say, ETFs. The definitions both help and hinder thinking. Unfortunately, it has given some firms the impression that they don’t need to change anything, which is not the case. I think the ambiguity is likely to resolve itself in time.
What is likely to happen to those clients that do not survive the “cut” of a client segmentation exercise?
CC: It depends on the firm. I prefer the term client stratification better than client segmentation. Some won’t pay £100 but may pay £5 or accept a reactive process. There need not be a client firing programme although it may make sense for some clients.
DH: Although we started as an RDR business and only took on people that paid their own way, we have made some mistakes. Every client has a level of profitability but it is tough to turn down business. DH: There has certainly been a lot wider take-up of passive strategies although this may be because advisers want the additional margin available from passive.
CC: The risk story with passive is easier to explain. It is part of how the value chain will be contested over the next few years. Will advisers get a piece of the asset management pie? I suspect that those closest to customers – the IFAs – are likely to hold the cards.
Do you think that advisers are taking business transition on board?
CC: I fear that there may be a group of very experienced advisers with nowhere to go apart from the consolidators. If you are going to sell, you need to do your transition faster than anyone. Many are not offering lump-sum payments any more but an annuitised approach.
DH: Documents such as Adviser Horizons and the Aifa Academy were not available when I started out. Advisers can save two years through this type of thing. They just have to sit down and start dealing with it piece by piece.
CC: There is a still a capital adequacy issue for middle-sized firm of 20 advisers on a £3-5m turnover. Research we did suggested that the regulators currently require £10,000. These businesses held £180,000 and It will be difficult to go in front of a client and say you are regulated in Polandthe FSA has now moved the requirement to £500,000. This raises two questions – how can advisers raise the capital and what is the payback on that capital? The FSA is supposed to be coming back to us on this in the third quarter. This is a big issue for middle tier of firms that have done sensible things and are running proper businesses.
Can passporting work?
CC: We came to the conclusion that it is possible to move to another European member state and passport back into the UK. Indeed, an adviser would be free from Ombudsman liabilities and compensation scheme levies. But, of course, it is not a silver bullet. Advisers would need to deal with home state regulator and be authorised. They would also have to manage the passporting back to UK and understand the complexities of that.
DH: Clients won’t get the same protection. It will be difficult to go in front of a client and say you are regulated in Poland.
Where do you think the IFA should sit in terms of the type of clients it deals with?
DH: It is impossible to say because there are regional variances, the cost of running business are very different, technology can help or hinder. That said, I tend to think that we are equivalent to the marzipan layer in a wedding cake.
CC: I think it may reach a point where advisers pass a type of Gold Blend test. People say that they visit IFAs simply because they are those sort of people. It could be the foundation of lots of business if advisers get it right.