We are on the horns of a dilemma. The economics of delivering ongoing service to mass affluent clients are challenging, to say the least. Advisers, in the main, have struggled to settle on a solution that a) is cost effective and b) represents good value in the eyes of the client. Achieving both while simultaneously satisfying the regulator’s exacting requirements for proof of suitability is quite something else.
Two glaring challenges remain: suitability and cost.
Reservations about the former largely boil down to risk. Advisers question whether it is possible to use risk-profiled funds while relying wholly on an IT-based process to continually monitor performance against clients’ risk profiles and their investment objectives.
On cost, advisers are concerned that the economics simply don’t work for investors with, typically, in the region of £50,000 assets under management. For pots of this size (and increasingly larger) 50-75bps is unrealistic. Given that the FSA will also require tangible, traceable evidence of ongoing servicing (to justify the fee), many advisers have done the maths and are opting out of the sub-£100,000 wealth bracket altogether.
Though these are valid concerns, could this be short-sighted?
We cannot all play in the £100k pool. For a start, it is not big enough. The FSA’s Rory Percival last month highlighted an interesting incongruity, pointing out: “When we ask what clients a firm has they tell us one thing and then, look at the files, there is a different picture. Frankly they are aspirational and not realistic.”
Realistic or not, to target the high net worth customer and ignoring the 30 years that precedes that seems flawed. Today’s mass affluent will be tomorrow’s affluent. If advisers haven’t started the connection lower down the chain, these clients will be increasingly difficult to engage later in life. There is a real opportunity to both add a scalable revenue stream and use a technology-based process as an incubator for those clients who may become more profitable and, in time, ripe for moving up the ladder.
Sure, there are challenges, but how many of us have been genuinely looking for answers when we’ve put the question to our businesses? The fundamentals of advice will remain the same as time goes on, but the delivery of it may be quite different. As Seth Godin illustrates, local bookstores are in trouble not because they don’t work hard or care a lot, but because they are saddled with expenses that used to be smart (rent for a local storefront) in a world where they are merely ballast.
Phil Wickenden is the founder of So Here’s The Plan
All quotes below have been taken from interviews with QCF 4 qualified financial advisers from fee charging businesses.