Not before time, the industry is finally facing up to many of the major challenges of the RDR. Advisers are recognising that it is not just about passing exams, they have to have clients to service and affordable propositions to meet those clients’ needs. Firms are beginning to segment their clients and I even see some recognition that simply jettisoning those who are not profitable will not be an acceptable way forward.
However, there appears to be one major elephant in the room still to be addressed – how sustainable will current levels of individual adviser remuneration be after 2012?
Although it is rarely discussed publicly, in most firms, the adviser who sits in front of the customer presently takes by far the lion’s share of revenue from the advice process. In practice, their companies are absorbing significant additional costs which, because of high levels of commission, can still allow the firm to break even. But how many adviser businesses achieve the level of profits achieved in other industries?
How often after the adviser has been paid is the adviser firm able to retain enough profit to build up their capital base?
Inevitably, a wide range of models will be adopted by advisers. Some will charge by the hour, others will seek remuneration based on the amounts invested and doubtless a range of fixedprice services will emerge.
In recent months, F&TRC has been continuing its work on the true costs incurred by advisers servicing clients. This continues to identify that, in many instances, adviser firms are subsidising clients and that the RDR will significantly increase the true cost of advice to consumers.
The challenge to firms is clearly going to be how to reconcile the true cost of servicing with delivering valuable services to consumers at a price they can afford.
It is questionable if the most advanced client management propositions have the detailed level of functionality that will be needed after the RDR
From this work, it is already apparent that, for consumers below certain thresholds, firms may need to be offering very different types of services, not only in terms of the way in which advice is delivered but perhaps also the type and range of products.
Advisers will need to keep even stronger control and understanding of costs on a case by case basis. Commission processing has been one of the major areas where client management systems have made enormous progress in recent years, however, in my experience, few adviser firms make full use of the detailed capabilities which such systems have to track activity at a detailed level.
Equally, it is questionable if the most advanced client management propositions currently have the detailed level of functionality that will be needed after the RDR.
Few, if any, such systems would suggest they are a suitable alternative for a fullblown time recording, activity management and accounting system such as those offered by specialist accounting software suppliers.
Given the FSA’s appetite for transparency, I believe there is a strong case for advisers to show the proportionate costs of FSA fees for each client, compensation scheme contributions, professional indemnity insurance and other costs demanded by the regulator.
In the case of FSA and compensation fees particularly, these are, in effect, regulatory taxes imposed on the consumer and certainly should not be displayed as part of the adviser’s remuneration but as a mandatory cost that the adviser is forced to pass on to the customer.
At a time when so many firms are moving their remuneration to trail-based on assets under advice, perhaps firms should identify separately the percentage of the client’s investment that needs to be deducted to cover the regulatory and other mandatory charges incurred.
In a world where consumers will be far more aware of the cost of the services that their advisers provide, it must be inevitable that at least some clients will require very detailed breakdowns of all the time spent on their behalf.
Against this background, how many chargeable hours will individual advisers be able to justify to clients? How many advisers could currently claim to spend 80 per cent or more of their time on client-related matters? In many cases, client meetings and directly related work may take up less than half that amount of their time.
In other professional and advice industries, such as accountancy, law and management consultancy, organisations frequently look for 85 per cent-plus utilisation of staff.
Against this background, there may be a need for advisers to radically rethink how their time is spent. Just as directors of adviser firms need to be considering how they will restructure their propositions, individual advisers need to be confident that they can continue to justify their level of income in the context of time spent with, or on behalf of, paying clients.
If the complexity of the regulatory environment is really the reason that so little time can be spent guiding clients, is it not essential to record in detail each of the regulatory activities carried out for a client on a case-by-case basis.
It has often been said in the past that advisers do too much work that they do not tell the client about. Providing clients with a detailed summary of all the work carried out, even if it is only as a supple-mentary statement, may be an important way of reinforcing the amount of time advisers spend on a client’s finances.
Maintaining this manually will, in itself, be a time-consuming process. However, with the right level of adoption of client management technology, it should be possible to automate the vast majority of such processes. Firms might be well advised to consider the extent of accounting facilities needed as part of their review and implementation of new systems as they implement their RDR plans.