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The flexible future

Most IFAs are reviewing their business strategy against the background of a changing regulatory environment, with CP121 and CP166, the change in remuneration with falling commission levels and the spectre of Sandler&#39s suite of investment products on the horizon.

As an IFA running a business which is committed to independence, I am interested to see how the product providers are approaching the challenge to their businesses with a view to securing future distribution.

Some, such as Scottish Equitable, have taken the route of buying directly into IFA distribution through business acquisitions.

Clearly, companies such as ScotEq will be expecting a return on their investment in the form of new business and the demise of the better than best rules will no doubt make this a probability rather than a possibility.

However, I question if this is at odds with its wish to achieve distribution through the major networks, which presumably are concerned that product providers are setting up in direct competition to themselves.

In the case of our business, the introduction of the menu system is something which is very much in line with our business model and Paul Smee and his colleagues at Aifa deserve a vote of thanks for vigorously proposing the system to the FSA.

What does concern me, however, is that the FSA appears to believe that one adviser could, in fact, carry out advice in three different arenas – independent, multi-tied and limited advice.

I find it difficult to see how an IFA could decide what avenue of advice is best for a particular client without meeting him and carrying out a fact-find. If, having carried out that fact-find, limited advice turns out to be the best route, how can he make this pay and can anyone think of a more confusing system for potential clients?

There is little prospect in the short to medium term that the investing public will be educated to such an extent that they can make their own decisions as to which type of advice will suit them.

Bearing in mind that all IFAs are faced with increased costs – principally professional indemnity cover and regulation – this has a significant impact on the way in which an IFA business in the future could be structured and it will have a direct bearing on profitability.

My suspicion is that there will be a fudged compromise and I do not think this is in the interests of the IFA sector in the longer term.

I have no doubt that multi-ties will come and there is a good deal of evidence that product providers are gearing themselves up for this.

From a regulatory perspective, I can see that regulators are attracted by the concept that there are deep pockets sitting behind the IFA in this type of environment.

The question that the IFA needs to ask himself or herself, however, is whether he or she is providing purely product-based solutions to client financial issues or whether they are seeking to produce holistic financial planning advice, which is not reliant upon product sales for remuneration – fee-based advice.

To the extent that firms deal in product-based solutions, they should have little concern about structuring on a multi-tied basis.

Fundamentally, this should produce cost savings in terms of the efficiency of writing business through e-commerce delivery channels while providing financial stability to cover costs of training, etc.

As I said earlier, I do not think this sits well with the wish to gain distribution through the big networks so product providers will need to tread warily unless they are happy, in effect, to create their own networks.

As far as the distribution of Sandler limited advice products is concerned, I would see this as the arena for the banks and those with wide distribution capabilities aimed at the smaller retail investor. This should not be of concern to IFAs. On the whole, there is little value they can add for clients who operate on this basis and, in any event, the remuneration involved will be very limited unless, of course, the product-charging basis is amended, which seems unlikely.

This would leave the IFA world concentrating on the delivery of advice to higher-net-worth and corporate clients which is prob-ably where we are best equipped to provide added-value advice.

Against the background of my comments, I approach the future with a certain amount of trepidation. Regulators and product providers need to act in a sensible manner to facilitate a structure for the provision of advice which works in an environment where product cost has been driven down.

I think that trying to develop fixed business models now, in anticipation of what these changes might mean for the IFA sector, should carry a risk warning. The best policy is to not have any fixed or pre-determined views and to retain as much flexibility as possible until we have a clearer idea of exactly how the environment is going to shape up. We can then pursue the business model which best suits our approach to advising clients.

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