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Winning formula

All parties would win if advisers turned to a system of annual management fees.

We live in a world where there is a focus on sustainable futures. Up to now, we have come to regard “sustain-ability” as an environmental issue but this is an equally important issue when we talk about our financial futures.

Access to advice and services which help with financial decision-making for consumers has never been higher on the agenda. Decisions around long-term savings, retirement planning and inheritance are fundamental to the financial futures of most people.

The Government knows that it cannot provide the long-term financial security people expect in retirement and is encouraging individuals to take responsibility for planning their own futures. But most people will not take these decisions without some form of assistance.

Fifteen years ago, there were over 180,000 sales-people servicing the distrib-ution of products. This was made up of a combination of tied agents, company agents and IFAs all offering differing levels of service and advice. Financial advice varied from the very basic home service from the man from the Pru through to package selling by tied agents and more sophisticated advice.

Gradually, this model of advice provision has been eroded and changed. As the number of home service and tied agents has dwindled, IFAs have progressed from being the “quality minority” of advisers to being the major vendors and source of advice for long-term savings plans.

What affect have these changes to the financial advice model had on our industry? We arrived at a position a few years ago where the industry had shrunk to roughly 40,000 advisers. As the number of financial advisers fell, the national shortfall of long-term savings grew to a well publicised £27bn a year.

Historically, front-end-loaded commission has been the major source of adviser remuneration. This has led to concerns over higher rates of churn, short-termism in performance focus and advice and inadequate incentives to provide an ongoing service.

Addressing these concerns is a complex issue but earning regular and ongoing annual management fees can only help. The major rewards in such a system come from the longerterm retention of business combined with the effective performance of the funds under management.

Advisers could benefit from long-term and secure income streams secured through sound initial advice followed up by ongoing service and long-term relationships with their clients. Clients win by choosing an adviser who thinks through and acts upon their client’s longer-term interests and financial goals. Life, pension and unit trust companies in turn benefit from longer-term client retention and a steady stream of funds under management. Finally, the legislators and regulators must win if the above parties are winning.

For advisers to make this process of ongoing fees work, they need to have the confidence in the initial investment advice they provide. This is the best way to ensure the longevity of the assets and the ongoing revenue streams.

A further step towards a sustainable advice industry lies in the greater use of multi-manager funds. While this usage of multi-manager may not apply to advisers who specialise in investment management for more sophisticated clients, it seems one of the most important steps towards sustainability is the provision of advice to the majority of consumers.

Multi-managers would allow the adviser to provide a number of built-in benefits to their client’s portfolios. These benefits include embedded advice, audit trails of investment decisions, manager diversification and manager research and selection. Multi-manager also provides automatic asset allocation (strategic and tactical), portfolio rebalancing and performance monitoring. This approach would also contribute to increased sustainability by allowing advisers to spend more time with clients.

Robert Noach is director financial institutions group at Schroders.


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