Consultant View by Brett Davidson
With clients now able to turn off ongoing revenue, IFAs must ensure their proposition is outcome-focused and provides value for money to ensure their long-term survival
The retail distribution review (RDR) has caused an explosion of activity and thinking, much of it well overdue. The issue of qualifications received the most attention, which was not surprising given the threat to advisers unable to meet the demands. But the most interesting issue has been the change to business models, and that is not over yet.
It seems to have only just dawned on some advisers and firms that the biggest threat to their business is coming this year, and it is not fee charging. Most advisers accept that clients will pay fees if they offer something of value. The big question for 2013 and beyond is: will clients keep paying?
Ongoing revenue at risk
The RDR enables clients to turn off advisers’ ongoing revenue. For many IFAs this will become a growing problem as more new business falls under the new regime. Even legacy business will eventually be subject to the new rules, putting existing revenue under threat.
It is possible that the adviser-client relationship will withstand this threat, as it has many other threats in the past. The annual review meeting is perceived as pretty high value, but its content can leave some clients feeling as though they have had a cup of tea and a chat. Will they be willing to pay £1,000, £2,000 or £10,000 per year for this?
When clients see their charge of 0.5%-1% of assets under advice converted into pounds, this might be the question they ask themselves. If they conclude they are not receiving value for money, they may withdraw their custom, thereby cancelling the adviser’s ongoing revenue.
This will not start with a call to the adviser; the client will go straight to the provider that administers the revenue, making it difficult and time consuming for the adviser to rescue the relationship and the fee (if it can be rescued).
Polarised business camps
If this scenario plays out, the once predicted 20%-30% decline in adviser numbers may take place, albeit slowly, over a three-to-five-year period. The businesses remaining may start to polarise into high-value and low-value advisory businesses.
High-value firms are not concerned about these issues because they have a robust offering for their clients that will continue to justify a premium price. Their fees are not for managing money for clients but for providing a complete lifestyle financial planning service that delivers an outcome.
Low-value businesses will be those that survive but without a comprehensive and robust offering. When the time comes to sell such a business, it will be difficult to command a premium price for the client bank.
Yet buyers of this type of client bank, the high-value firms, will be able to extract significant arbitrage value from some of the clients and will be able to secure bargains around the industry for years to come.
All advisers must choose whether they want to be in the low-value or high-value camp, and face the challenges their decision brings.
These changes, many of which are driven by market forces and the Financial Services Authority, have forced advisers who previously shunned the financial planning model to start moving into that space and to think about adopting tools, such as cashflow modelling, to show clients the future impact of their choices.
For example, the most common question financial planning poses for the pre-retirement client segment is: how much is enough at retirement? Yet when asked if their proposition addresses this question, many advisers say ‘not really’ or ‘sort of’; neither of which will save the day in a world where clients can turn off ongoing fees.
Clients want outcomes, not more financial products or even advice.
Re-engineering a business to deliver outcomes requires some significant shifts in mind-set, greater skills from all levels of the business, and investment in systems and technology. Little of that is evident in the majority of firms in the adviser marketplace. They are likely to remain under pressure for some time to come.
Innovation on the rise
The benefit of all this pressure is a rise in innovation at the top end of the profession. This includes firms like Yellowtail Financial Planning, which is narrowing its focus and finding its true micro-niche, and others like BoulterBowen WealthCare, Bloomsbury Financial Planning, Paradigm Norton Financial Planning and Fiscal Engineers (to name a few), which are continually trying to push the boundaries of what a great financial advice business looks like.
The full impact of the RDR is only just beginning and advisers who think a few tweaks to their old way of working will be good enough this year might be in for a rude awakening.