15th August 2013

Damned if you do; Damned if you don’t

The speculation of what will happen to Networks post RDR has still yet to be proven one way or another.

Many pundits said that smaller IFAs would have to join Networks and nationals as their regular income would suffer under Adviser Charging (AC). Some said that Networks would be under so much pressure to change their models so radically; they would force the smaller IFAs out due to excessive costs.

Changes were obvious as networks will no longer be able to provide “value” through their negotiating favourable commission terms with product providers. The market is likely to be reduced as IFAs through their own initiative, whether a network member or not, will focus on the higher earners, seen to be able to afford fee based services, disenfranchising millions (5.5 Million according to a Deloitte Report in 2012, some 11% of the UK Adults).

Three main contributors to the reduction in market size are due to the fact that 87% of customers who purchased a financial product in the previous three years thought the advice was free, and for their advice plans in future;

• 27% said would be likely to go direct to the provider
• 32% said they would do their own financial planning, research and administration, negating the need for an adviser, and
• 24% said they would be likely to reduce the number of times they used an adviser.

Now we don’t intend to argue the rights and wrongs of restricted or independent in this piece, but you are ‘Damned if you do; Damned if you don’t’ so lets step beyond that and look at what networks may argue is the purpose of their business model.

A restricted advice network can offer many benefits to their advisers including a ‘community’ or strength in numbers, an AC facility where the network sends out and collects the invoices and does administration, offers regional training sessions and provider information dissemination, compliance, T&C and other benefits.

Even with all this going on and the raft of people involved, the one man band can feel very insignificant; lonely even. When he looks at the range of the products sold and knows that they don’t always fit with the client needs; sees the slice taken from the invoiced services he issues and wonders if that last training session and provider product cascade was worth that cost; and that immovable and inherently slow responding Compliance or T&C Department are seemingly costing him money; networks may not seem the best option anymore.

Networks themselves are going to have even bigger problems with providers scaling down or exiting (some already sold off) their ownership of the businesses and with the rebate restrictions from platforms next year, they must surely have to look at providing other products and services to stay in the game?

The problem can be identified not by just the Networks, but for the majority of financial institutions who are still waiting to be pushed into the 21^st century. The network proposition may be justified by the statement of providing delivery to client objectives; a control over administrative cost and performance; and the control of investment management behaviour. It is only when you stop to analyse these issues that you realise that they are borne of a company centric mentality and are great when the client objectives are aligned with what the company provides. Control of costs and performance is done at a cost, still based on a commission percentage level or pre-RDR days and investment management behaviour is subjective and wide open for criticism, even more so with the regulators concentration on risk assessment mismatch between funds and advisers.

Effectively, the regulator could look at restricted network providers very closely and could determine that the restricted offering is not suitable for the needs of clients and that they were shoe-horned into the offering available; thus another miss-selling scandal is borne.

To become progressive and proactive advisers or networks need to react to the needs of the marketplace and not all follow like sheep doing what they have always done (under whatever guise it may be) as we all know that the definition of insanity is doing the same thing we have always done and expecting a different result.

With the constriction of the marketplace, and the changes in attitudes to people generally through things like RDR and increased use of Social Media why not concentrate on designing products and services that can be profitable from the 1.8 Million people with £10 to £30k or the 800,000 with only £30 to £50k in savings. Or perhaps the 9% of UK investors who would be willing to pay a one off fee of around £300 for a transaction might tempt providers or networks to start looking at alternative value and loyalty products. Another sector may be the disenfranchised wealthy who see the AC being a licence to print money and even if they do not opt out (either fully or partially) will seek greater value from their advisers. They will do so by switching to cheaper options or by demanding better levels and quality of service. Don’t forget all of the orphan clients that the 1,000 plus vacating advisers have left behind, just waiting to be scooped up into a new financial planning home.

The key to networks and indeed any financial firm in the future is to switch their focus from company centric to customer centric, use Social media to listen and interact with their marketplace, get ideas, share experiences and design new products. This way there will not be the 2.5 million people with £10 to £50k of savings lost to online market product warehouse companies and the tech savvy savers of today will become the wealthy affluent at a later stage of their life. All firms need to stop thinking about their immediate cash flow and strategize to leverage the data that is available and start to plan their collaborative future.

About the Author

Lee Werrell is a Chartered FCSI FISMM and owner of CEI Compliance: a provider of compliance services to Panacea Advisers. CEI Compliance has been involved in strategy setting and RDR development as well as risk and compliance consultancy work. Isn’t it time to review yours?

Research source: Deloitte: Bridging the advice gap. Delivering investment products in a post RDR world.

RDR, Regulation