The IFA market has faced many a challenge over the past 20 years – obstacles which have continually eroded the margins available from running a profitable business.Costs have escalated with training and competence requirements, professional indemnity insurance premiums and servicing expectations. There has been a pincer movement on margins, with reducing commission in the investment and pension arena. All this comes within the backdrop of a market in which the consumer has become less and less confident as a result of events such as Maxwell, the pension review, 9/11, dotcoms, Enron, Nick Leeson, the endowment review and so on. The resilience of the IFA has been admirable in adapting suitable tactics to cope. However, if advisers do not fundamentally change their business proposition and/or structure, they may well be facing the straw which breaks the camel’s back. The fat margins of the past 20 years have been continuously eroded and what is about to hit the market will mean that many profitable businesses could make a loss unless they change. The reason for this situation is the arrival of the menu and Sandler-based products, which I believe will shave another 20 per cent or so off the average commission earnings of many IFAs, with potentially a similar reduction in trail income. If IFAs currently charge above the market average they will need to demonstrate clearly the added value they provide to warrant this or reduce what they take in commission. There will be little motivation for commission-based IFAs to market Sandler products proactively but the mere existence of the products will put pressure on the rates taken by similar products, as we have seen with personal pensions since the arrival of stakeholder. This reduction could tip the balance for many advisers. We are now approaching a watershed. It is time for the IFA to make some important and difficult decisions. The challenge is to come out fighting with a message which promotes their value-for-money proposition. The choice is to justify charging above market-average commission or charging fees for ongoing service or reduce services traditionally funded by wider margins. But what is that value? The customer does not recognise it often enough as IFAs themselves do not always market their proposition to the right customer needs. A key underlying problem facing the IFA market is that, in most instances, there is a mismatch between what the consumer wants and is prepared to pay for and what the IFA promotes and how they charge for it. Too many IFAs promote the mantra of technical experience and ability to offer the best product in market. My research suggest that clients’ key drivers are to have peace of mind and save time as well as having a trusted and consultative relationship. The product and technical expertise is not irrelevant but it is secondary. Best product is a matter of opinion. If it were not, why is it that different advisers, often recommend different products and funds to the same client? The market needs to recognise that the service proposition is as critical, if not more important, than the price and features of a financial product. If it does not recognise this, then it risks becoming very price-driven. The former will demand greater quality focus, which comes at a cost but also adds broader value, which the IFA can charge for. The latter is very price-sensitive and requires the IFA to operate even more efficiently to maintain margins. To survive, IFAs will either have to cut out a lot of servicing activity and operate on a slick, efficient transactional basis or begin charging retainers and fees for any ongoing service. I believe in commission rates at a level which is fair for advising on and transacting products. What is not fair, is for the market to expect this to fund an ongoing service. Commission is traditionally paid for selling a product. Customers pay regular or one-off fees for service in most other industries, so why do so few IFAs charge on this basis? It is primarily because they have not had to. Any further reduction in commission could force the issue. Arguably, this may not be a bad thing for the market. Reductions in commission income could be more than offset by improved productivity as IFAs stop giving service away for nothing and start either to charge retainers for service and/or sell more products without a commitment to the expense of ongoing service. In developing a viable fee-based proposition, I do not advocate the use of hourly rates as a billing mechanism. This potentially caps the earnings’ potential of an IFA and can, in many instances, sell the value of their advice and service short. Equally, clients feel uncomfortable leaving a clock ticking and effectively providing someone with an open chequebook. I advocate the use of fixed and value pricing when marketing a fee-based proposition. I believe that over the next five years we will see a marked shift in the volume of IFAs’ income coming from fees and some 50 per cent of existing commission income moving from the IFA market under a multi-tie or tie model. An article such as this can really only pose the questions and leave the reader feeling “so what?” What I have sought to do therefore is attract your attention to the issue and create an interest in exploring it further in a much more detailed report which is available to you via our website: www.axa.co.uk/intermediaries/managementconsultancy
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