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Shock absorbers

John Lappin looks at another year of trial and tribulation for advisers, saying that the model is intact and that failures can be put down to individual enterprises. He looks at ways that the sector can protect itself against further knocks.

It is probably tough out there for the ball bearing manufacturers. Contract cleaners may be under pressure from changing Government attitudes to, well, contracts and record shops have their own very significant internet threat. Closer to home, lawyers may face their own unique challenges, too.

These are only a few random sectors. But surely when it comes to threats, opportunities and managing a changing landscape, financial services, and financial advice in particular, must be almost unique and the past year has been no different.

There are many advisers who have found themselves, sometimes through no fault or no real choice of their own, a new home this year as networks have crashed.

The burn rates in some of these big businesses always meant they would eventually be engulfed in flames.

The regulator continues to send mixed signals on just about everything. TCF and principle-based regulation go hand in hand with continued interventions left, right and centre on the quality of advice. In the retail market, it is pretty safe to say it does not know what to do.

As for commission, when stoking the debate, the FSA managed to bring up the failure of many big IFA groups in the commission argument. But it was wrong to suggest that IFAs themselves are failing.

Some models are under strain, with both the network and support services model facing challenges. But the businesses that crashed were probably built too fast and many also had difficult transitions from the original plans when management changed. Any failures were down to individual businesses – not their type of model – and anyone who doubts this should look at Positive Solutions. It certainly was not about commission per se.

Doubling commission rates – some of the more bizarre market behaviour recently – may well have kept some businesses going longer than necessary but even when the organisations collapsed, in the end, advisers were OK.

Most moved to another network or self-employed set-up. Although they would much rather have had their pipeline commission completely guaranteed from the start and no doubt they had some sleepless nights, anecdotally at least, they seem to be OK. And their incomes probably have not fallen significantly.

Owner managers face different pressures. They have a range of choices about how to structure their businesses. What wrap services (if any) to choose? What product areas to embrace (or even to avoid)? How to escape the wrath of the ombudsman and the FSA? And how to strike a balance between investment, protection and mortgages or whether to quit any areas entirely? Many are probably fretting about their business models while some organisations and businesses are turning a nice profit out of telling them it is broken.

The landscape that advisers operate is in changing rapidly, too. Life offices are still in that process of reinvention although it remains difficult to understand what the goal is apart from some adopting a “what we have we hold” attitude while others favour the “how the hell do we get established in Asia and get away from all this hassle?” plan.

Fund managers now are moving in on with-profits bond territory and then some. Yet their routes to market are changing. No fund manager relies solely on marketing to the top investment brokers – there are very strong multi-managers, fund supermarkets and other wraps – while inevitably what the fund manager distributors and life office distributors offer are coalescing on the same space and challenging each other aggressively. Managers may be selling through some life offices that they are also competing with.

The commission structures may vary and may, of course, be controversial but advisers are recommending from a vastly expanded universe of fund management talent.

Some IFAs may decide to go their own way and avoid providers altogether, with Nucleus making its PR presence felt if not yet its actual presence.

As for protection, the market is still skewed for a huge variety of reasons towards certain types of product while income protection remains undersold.

It is not a market at ease with itself, with its definitions or its sales processes. The expected abolition of PTA will hurt and it will struggle to find another good story.

As for the lenders, they operate to a different set of rules riding the lending and housing boom and not worrying about the investment strand of the market. But there is not exactly a problem of choice or indeed over-regulation, for already regulated IFAs at least.

In tax planning advice and more complex pension advice, the Government has been doing no one any favours with its changes of mind and oft-seeming vindictive attacks on the middle classes. At times it appears the Government wants to remove all the justifications for pensions and tax planning, even ones where it can affect beneficial outcomes for free or even with a net gain such as Asps.

On the ombudsman front, it seems that claim-chasers are pump priming every possible aspect of advice while the spectre of reviews past, present and future stalks the industry.

So, what do IFAs do about all this change? Changes in markets are probably inevitable. No one should rely on yesterday’s investment trends tomorrow but few advisers do not know that. Housing markets can crash, too, but that is unlikely.

Government changes of mind will probably continue, complete with stick-in-your-craw hypocrisy over why changes are being made. The compliance and disclosure picture will continue to shift between key facts, key features, menus and IDDs.

Stationary will have to be changed again and again and a fickle regulator and ombudsman, like the poor, will always be with us along with cheerleaders in the national papers.

Multi-tying may be an option but make sure you are ready for the inevitable culture shock as at least in recommendations you cease to be your own master or mistress. So what IFAs can do is to proof their businesses against outside shocks.

This may sound a little boring but it means using technology, working out how to segment clients but also above all diversifying business streams and checking all the new services you sign up to.

The biggest threat probably remains some regulatory attack on commission. It may simply be another attempt to haul the IFA label off advisers who do not charge fees – or it could be more far reaching as the FSA uses principle-based regulation in some as yet unspecified and unprincipled manner.

So this may mean that IFAs look at the business mix and diversify it or look at the specialist services they are offering and make sure their model is robust enough to withstand market changes or indeed Gordon Brown or his successor’s size tens if they make another tax grab.

In more general terms, Money Marketing is not going to hector IFAs to change to a fee-based model. We are not running a small circulation magazine with fortunes based on such a change happening so we are not about to try and dictate to the market in teeth-gratingly sanctimonious tones nor contort our coverage to make it fit the fees agenda. But we do suggest again that those IFAs reliant on up-front commission look at ways to move away from it, that advisers find ways to justify earning trail commission and that at the very least advisers test whether some of their client base have the appetite for fees or whether there are any services they might offer which could attract fee income.

That at least may proof their model against those in power who hate commission in all its guises whether their hatred is justified or not and mean that IFAs and Money Marketing can continue in business safely.

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