In the new world after the RDR, firms have been forced to restructure their business models in order to meet new the regulatory requirements and the increased focus on charges has forced many advisers to examine their business model from the ground up.
Speaking at The Platforum Roadshow In April this year, Financial Conduct Authority technical specialist Rory Percival said that in order for small advisory firms to operate effectively going forward, they will need to look at outsourcing a lot of their functions.
It seems many firms agree and the trend to adopt outsourcing has seen a lot of take up in the area of investments but there are many other areas this can be applied to, including protection.
Plan Money and Master Adviser are amongst many firms who have chosen to do just this. But what benefits are there to outsourcing protection and will many other firms follow suit?
With advisers now adopting fee-based models for their advice services and the increase in regulatory fees, the cost of running their businesses is of vital concern. Outsourcing a firm’s protection administration should enable advisers to spend more time offering advice to clients, therefore generating higher income long-term.
“It is more efficient for us to pay someone to process the applications. The time that it saves us in administration more than compensates for work we can do better elsewhere,” says Plan Money director Peter Chadborn (pictured).
Master Adviser senior partner Roy Mcloughlin says: “We decided that the man hours that we were spending chasing up information were disproportionate to what was coming out and the only people who were suffering were the clients.”
Another advantage of outsourcing is the ability to use specialists to complete application forms which can deal with fairly detailed medical information.
Chadborn says: “I am a financial adviser. I am recommending a protection product that a client should have and that is where my role should stop because I am not a medical expert. I need to have a decent understanding of how a client’s health may effect the success of an application, but what I don’t want to do is get in to detail.”
Highclere Financial Services partner Alan Lakey (pictured) says the arguement about saving advisers time is a fair one, but the decision of whether to outsource or not comes down to how much time you can save compared with how much is costs to pay someone else to do the job. He points out that with outsourced services, advisers end up paying regardless of whether a protection case goes on risk or not.
“I have to be persuaded that it would make sense and I think there is a lot of other people in that boat as well. How many firms out there would be willing to spend £90 of their money on a case? You have to pay whether it goes ahead or not, and in return you are buying time. It is whether an adviser can buy enough time,” says Lakey.
Direct Life is one company that offers an outsourced solution for financial advisers and can deal with the processing of applications, communicating with customers and chasing applications on behalf of advisers.
The company reports a gradual increase in business and interest from advisers since the RDR came in to force.
Sales and marketing director Neil McCarthy (pictured) says that the company’s telephone based application gives advisers peace of mind as in addition to being able to talk customers through the application process and ensure full disclosure, the fact that calls are recorded means any complaints generated if a claim is turned in down due to non-disclosure can be dealt with easily.
Advisers who rely on paper-based applications do not have that peace of mind.
McCarthy says: “The adviser is transferring that risk. They could be absolutely perfect but ten years later if there is a claim disputed, a customer could say – ‘I definitely told the broker that’ but there is no evidence one way or the other.”
This raises the question of who retains any liability for any errors made in the collection of information and administation of any application which are not the client’s fault.
Chapters Financial director Keith Churchouse (left) disagrees, says many adviser would be unwilling to take that risk from an external companies actions.
“It is possible to make errors in the submission of things like medical factors, for example, but who is then responsible? Advisers or the outsourced party?” asks Churchouse.
Chadborn says that this depends on the terms of any contract drawn up between the adviser and outsourced partner but says while advisers will retain the responsibility for the overall advice, it is perfectly reasonable for any contract to stipulate that the outsourced administrators takes full responsibity for any actions, such as the collection of data, they carry out on the advisers behalf.
Lakey says advisers considering outsourcing need to be very careful who they outsource to.
“If you find out that people are not doing the work in the way that you would like, it can be difficult to extricate yourself from a contract that is in place. Unless there is something concrete that you can prove in a court of law, chances are you will be breaching the contract so it is a bit tricky,” says Lakey.
One factor that has perhaps prevented more adviser businesses from outsourcing business functions is the lingering repution for poor customer service that many parts of the financial services industry suffer from.
“Advisers are historically reluctant to let go of the client relationships. Clients would say the service they receive from life companies is pretty poor and I stand by that. Therefore it is not surprising that advisers are not comfortable letting go of that relationship,” he says.
But despite being lukewarm on the idea of outsourcing for his own business, Lakey believes there will be more activity from advisers within this area in the future, particularly due to the success of other areas of business which advisers already outsource.
“You could say that there is some kind of affinity with people who use discretionary fund management for investors. There is a logic to taking away some of the nuts and bolts of the graft and just thinking of the things that really we are paid to do, which is find clients and do some kind of analysis for them,” says Lakey.
Chadborn agrees with the FCA, and believes in order for firms to operate successfully long-term, advisers need to look at outsourcing protection administration as an option.
He says: “In the world we live in it is genuinely harder to maintain levels of profitability because of the increased administration cost and burden and increased regulatory costs. If advisers do things differently and become more efficient and de-risk, they will still be in business is five years time.”