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The real meal ticket

The defined-payment system proposed in CP121 is gone and its replacement, the menu option, will soon take its place.

As IFAs wait to find out exactly what is on the menu in the coming months, some are recognising that it is really just the start of the end for the traditional IFA practice as we know it.

At first glance, the revised menu option proposals, recommended by Aifa and adopted by the FSA at the end of 2002, seemed very much like good news and, for a while at least, this revised approach succeeded in reassuring IFAs that just maybe, their role in the marketplace of the future could survive and they would not have to change the way they operate at all.

The defined-payment system proposed a wholly fee-based approach based on disclosing clearly the cost of advice to consumers up front, the new menu approach promised to provide a system of disclosure that would reassure consumers and allow them to choose their adviser on a commission or fee basis.

CP166 has taken this a stage further by recommending an initial disclosure document to help consumers understand the scope of the advice or service being offered. For many IFAs, this may pose little threat and is what many of us have been doing.

The cynics may suggest that the FSA&#39s backdown on the defined-payment system revealed that the agency&#39s main focus of interest is less about tackling so-called commission bias than an attempt to win the approval of the consumer at any cost.

After all, despite widespread consumer mistrust of the financial services industry, we all accept that if you ask a consumer whether they would be prepared to pay for financial advice, most would say no.

The FSA must have regarded Aifa&#39s proposal as a good way out and one which could possibly win them support, not just among IFAs but also among consumers.

Should we welcome the menu approach and how should we expect it to affect the industry? Try as we might, we cannot ignore the market forces which are affecting IFA businesses.

Following the Sandler review, much tighter regulation will soon be in the pipeline, bringing new demands for IFAs to provide new or added-value services to secure a profitable client base.

These new demands are coming about when commission is being eroded more rapidly than we could ever have expected.

The major financial institutions are preparing to do more direct business with consumers and are taking steps to reduce their unprofitable commission-based business.

Why should they be expected to continue to do business at a loss? In June, Clerical Medical wrote to IFAs to warn them of plans to reduce commission on its life product range. Before this, Axa announced plans to withdraw commission altogether on some pension product sales.

If there are any remaining disbelievers that market changes are inevitable and will bring rapid and irreversible change to the IFA industry, then surely they must concede now. The menu approach may have reassured some of us that we could continue as we are but such changes now clearly indicate that, while the terms of our doing business may not drastically alter, our ability to offer clients a choice of commission-based products to meet their financial needs may soon not be possible.

In the future, if clients want a genuinely independent choice of the entire market, they will need to pay fees.

IFAs which try to hold on to their badge of independence while watching their choice of product options disappear before their eyes will find their credibility become progressively compromised and clients will recognise it.

As for reassuring the consumer, the menu approach is unlikely to educate them on the benefits of paying for holistic financial advice which may or may not include a product sale with an option to remunerate their adviser by way of a one-off fee or offset commission.

The majority of consumers are likely to go direct for financial products and the remainder will be looking for an adviser who can do a lot more than just sell products but who can also advise them on investments, save them money through advice on tax planning and devise long-term financial plans that are geared to their specific needs.

As the industry waits to find out exactly what is on the menu, perhaps we should be asking, what difference does it make? As our commission-earning opportunities disappear, should we not be asking where we see our business opportunity in the future?

Just as many fee-based practices appreciate that they are facing an exciting new business opportunity. They are also facing many challenges.

Rather than waiting for what is on the menu, the industry should be focusing on its real meal ticket – making sure that they are ready to provide the consumer with the choice and the added-value service that the public are coming to expect.


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