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Regulatory costs will lead to adviser backlash

Deloitte lead RDR partner Andrew Power gives his view on the RDR and outlines what successful IFA practices will look like 

There has been a lot of discussion about the number of advisers who have left the industry because of the RDR. Where do you stand?

FSA research has shown that advisers numbers have already come down, particularly in the banking channels. There has been a 12 per cent reduction in advisers overall, with a 44 per cent reduction in the banking channels. Most of the banks have decided to leave the mass market, though the Nationwide is continuing to operate.

It is likely that the number of non-banking advisers will continue to fall, but at a less rapid rate.

For the most part, those who couldn’t qualify, or planned to retire anyway are now out of the market.

Advisers that come out of the market now will be those that can’t make the new model work for their business. We believe that there will be a further 10 per cent reduction in adviser numbers at least and it could be as high as 20 per cent.

In the new environment, what will a winning IFA practice look like?

There are two types of practice, we believe, that can work in the new environment. The first type of practice will be focused on affluent clients – those clients with £150,000-£200,000 or more of investable assets.

Clients with that sort of money tend to have complex needs. Money brings its own complexities and also, they tend to own their own businesses or have tax or trust arrangements, which will provide a rich seam of work for their advisers.

Then there will be advisers that cover a broader spectrum of clients, down to around £50,000 of investable assets. But these advisers will need to take a more segmented approach. They will only offer full advice to clients with higher assets and then some type of guidance to those with lower assets.

What type of skills will an adviser need to operate effectively?

It is a little in the air as to what advisers will need in terms of investment expertise.

Some say that you will need investment expertise to deal with the mass affluent. Others say that you can outsource it with discretionary fund management, a range of fund of funds or other managed solutions.

Most advisers say that £50,000 is the break-even point for servicing a client. The issue of disenfranchisement is really for those who don’t have £50,000 but have the potential to be a good client in the future.

Advisers may develop non-advised capabilities to help deal with this. Direct to consumer offerings can help establish a relationship with an individual. Then as the individual starts to accumulate wealth, the advisory practice has brand-name recognition.

What will happen to those clients that are disintermediated by the RDR?

Hargreaves Lansdown has been very successful and continues to attract the sophisticated self-directed investor. The real question is over those investors that are not as sophisticated. In general, these investors are likely to need some kind of guidance.

There are a lot of investors that are simply not au fait with financial markets. 

A decent non-advised proposition should offer a means to help these people through the process, ensuring that they can find their way through when they get stuck, perhaps by directing them to information or through the use of best buy tables.

The problem remains that most people have found it difficult to define an advice proposition like this and stay on the right side of the regulation. There is no easy solution to this.

What impact will the higher cost of regulation have on the industry?

Increasing regulation and its associated cost will have various impacts. It will certainly exacerbate the trend that sees advisers dealing with wealthier and wealthier clients as they need a certain weight of assets to get an income flow.

It will also put a lot of pressure on the networks. Advisers already paying higher costs will be reluctant to absorb network costs, which are also going up. None of the networks are profitable and haven’t been for some time.

I think there may also be a back-lash against regulation. Advisers will want more refined and targeted regulation that reflects their approach and the client groups with which they are dealing. There needs to be a recognition from the regulator that one-size-fits-all will not work.

Can you see further consolidation among advisers?

A lot of the one to two man bands that are dealing with clients with limited assets will come under pressure. Suddenly the cost of advice will be explicit and there will be a raft of new regulatory costs.

If you are a two to three man adviser practice with a City-focused client base comprised of investment bankers and similar professionals, then it is probably possible to make a decent living. However, that is the top end.

Again, it is difficult not to see a squeeze on networks – lots have already gone bust.

The reality is that people have not been able to make money by creating institutionalised advice groups. Firstly, this is because the value-added is between individual investors and their advisers and secondly, because of the regulatory trend, it is very difficult for networks or consolidators to have a scaleable model – they have to put so many controls in place.

The risk and compliance is increasing. The sellers would love to see more consolidation but there are not that many buyers. A number of private equity groups have looked at the market and decided that they can not make it work. A lot have simply seen how consolidators have struggled to make money.

What other consequences from the RDR are you concerned by?

People have certainly spotted that there might be an advice gap, but I see little evidence that anyone is doing anything about it. The regulatory pressures have been difficult to deal with and yet the regulator does not appear to have accepted that the new rules will create problems.

The platform paper will create a push to platform consolidation and also a move to clean share classes and differential pricing for those platforms with leverage and those without. Platforms are likely to accelerate the move to clean share classes and they will want to negotiate deals with fund managers for individual discounted share classes. This will be challenging for fund managers who will not want the time-consuming and expensive process of creating multiple share classes for the same fund. The creation of a sunset clause for legacy rebates will accelerate the timescales and the demand.

There is also a widespread move to managed packaged solutions, but there is still a question over whether this is something that consumers actually want. And can they be conveniently slotted into these funds in the way that providers believe they can?

There is a tendency for the consumer not to like this type of thing. Equally, it is hard for the adviser to justify their fee if they are just putting their clients into a low risk fund that is auto-rebalanced

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  1. Julian Stevens 22nd May 2013 at 9:12 pm

    “There needs to be a recognition from the regulator that one-size-fits-all will not work.” It already isn’t. And

    “yet the regulator does not appear to have accepted that the new rules will create problems.” The new rules already are causing problems.

    Does the regulator ever take on board (and actually do something helpful in respect of) any representations from the industry on anything?

    It’s “consultations” are hollow, token shams, just going through the motions. None of the submissions in response to its “consultations” are ever published for all to see and to debate in open forum. The regulator remains unaccountable to any outside, independent body. It takes little if any notice of any of APFA’s representations. Reportedly, a large proportion of the FCA’s staff don’t themselves know the answers to a wide range of queries as to how various aspects of its RDR should be implemented.

    From its monumentally expensive and lavishly appointed ivory tower at Canary Wharf, the regulator raises its levies year after year by whatever percentage it feels like and anyone dares not to pay up will have their authorisation cancelled. It’s a case of Pay up or pack up.

    It routinely dumps responsibility for its own failings onto the now all but punch-drunk IFA sector.

    Personally, I’m having my best year ever in terms of revenues from a combination of both existing and new clients. But the paperwork and the ever-increasing stringency of compliance are a major and hardly useful burden on my time and patience. My clients certainly don’t appreciate bundles and bundles of bumpf for even the most straightforward tranactions.

    Thanks to the regulator’s maniacal obsession with creating a perfect world that can never actually be realised, it’s all gone absolutely crazy. The fall in adviser numbers is proof of this.

    Though I don’t like the idea of having to turn away potential new clients, I can see the day coming when I shall simply have to, regardless of the likely value of their business to mine. What about the client with £25,000 to invest who phones half a dozen IFA’s, only to be told by all of them that they can’t take them on? Is this what the regulator wants? Is it at all concerned about such developments?

    But is the regulator listening? Will it ever do so?

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