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Size of the matter

FSA reminds those looking to consolidate that one size never fits all

The recent FSA warning to IFAs considering a move to one of the new consolidation vehicles is likely to be met with the usual knee-jerk reaction from the anti-regulation crowd. Those already feeling the pressure of change will most likely see themselves as unfair targets of a regulator biased against the older, more ‘experienced’ IFA.

Nothing could be further from the truth.

The FSA is trying to point out that one size does not fit all. What we have seen from the consolidator propositions (and this could also apply to many of the networks/nationals trying to sweep up smaller IFA firms) is the suggestion that every client can be moved into one of a small number of portfolios.

The aim is to make these historically unprofitable clients profitable, while freeing up much of the time associated with managing a disparate selection of legacy funds by allowing the adviser to focus on relationship management and financial planning.

But before I appear as a voice of praise for the FSA, there are a few gaps in its understanding of how advisers operate. For example, the practical definition of independence has evolved to now represent a combination of independence at investment (fund) level and acting impartially for the client. The provider of the chosen tax wrapper is of secondary importance as these have become increasingly ‘vanilla’.
However, it remains the case that independence is not compatible with a single product or wrap provider.

Clients ‘switched’ to a single wrap platform and into one of a small number of managed propositions, and those feeling pressure to move to a new product or platform with a charging structure to fund ongoing fees, should be concerned, assuming no reasonable alternative is offered.

Just because one size does not fit all, a consistent process should still be applied. In fact, I imagine the FSA likes to see process consistency within firms. If every adviser within a firm follows the same steps to reach a solution, there is a greater chance of a favourable and compliant outcome. Process consistency is not, however, the same as solution consistency.

Financial advice is equal parts science and art. In practice, this means that while a consistent approach to process is vital, different outcomes are likely. Firms that recognise this will be pragmatic about independence when it comes to the selection of products, wrap platforms and funds. They are unlikely to fall into entrenched positions on things like the active or passive fund management debate.

As 2012 looms, some advisers will opt for a dignified exit rather than pay the price of remaining in business. Let us all hope that in doing so they make sensible choices about their exit strategy, rather than fuel a future misselling debacle that will inevitably cost all of those advisers who remain a fortune in compensation levies and increased regulatory scrutiny.

Martin Bamford is managing director of Informed Choice

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  1. We should have learned some lessons from having just four big banks.

    This ‘cottage industry’ has worked very well for decades with few complaints generated by smaller firms because they operated in a diverse market, as soon as firms became ‘specialists’ they got fatter and expanded, examples would be pension transfers and mortgages during the late 80s and early 90s, the FSAVC feeding frenzy, then we have products like split caps, high income (precipice) bonds, PPI and other fads which small firms hardly ever bothered with because: (a) they were too busy with mundane general advice and (b) saw the potential for claims.

    Consolidation will never work for these small firms because they won’t fit in the ‘culture’ of large firms, they are independent of thought and spirit. I believe they are a national treasure which deserves encouragement to flourish on their own, as long as they don’t get too big! But there lies another issue, small firms are reluctant to employ other advisers or become partners because they don’t like the idea of having their own reputations of which they are extremely proud tarnished.

    Big is not necessarily beautiful, as the saying goes: The bigger you are, the harder you fall. Unless you know what you are doing of course.

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