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Paradigm Shift?
As you will be aware, we released the results of our survey on what IFA clients views were on the RDR and this at the very least has started a debate by bringing out a number of views on the subject from the industry great and the good.
And some provider comment too:
"Panacea’s RDR survey results highlight a number of important areas where focus is needed if we are to avoid an unintended consequence of RDR….. the loss of many valuable advisers from the industry.
Together product providers and intermediaries need to do all we can to ensure advisers’ market propositions are presented effectively and the value truly understood by clients and potential clients. Having a confident, profitable adviser community is essential if we are going to support the increasing number of people accelerating towards retirement in need of advice.
Stephen Lowe Just Retirement Group External Affairs & Customer Insight Director
Asset managers were hurt this week by a note from analysts at RBS who are concerned about the impact of regulation on the sector such as the implementation of the Retail Distribution Review. The note said that enforced deposit gathering by European banks and a UK ban on IFAs charging commissions could substantially alter the distribution landscape and demand characteristics of the European market for a long period of time.
The firm cut its rating on Hargreaves Lansdown to a “sell“ from a “hold”, while Ashmore was also downgraded to a “hold” from a “buy”. RBS picked Aberdeen Asset Management and Rathbones as the two firms most likely to escape relatively unscathed by the proposed changes.
More will no doubt follow.
Our survey highlights that the industry clearly has more than a bit of work to do around RDR. However, I think it’s also important to view the rationale behind our survey as well as all the comments from the contributing IFAs. With so many respondents (740), it is difficult to dismiss these results and as an industry we should continue to be collectively concerned.
After all,Simon Mansell pointed out that when the FSA looked at depolarisation and fees “they were quite happy to use only 3 research companies - NOP, IFF and ORC. ORC, who produced the research on probably the most contentious areas "Potential Purchasers" and "Fees and Commission". They based their research on?? Go on Guess? 20 interviews”!
As a neutral online community for smaller IFA firms, what we have tried to do is shine a light on many RDR concerns as well as the message around RDR awareness creation or lack of it in the eyes of those that should be receiving it, the consumer.
The extent of FSA commitment to the process so far is this link on their website buried in the consumer information section and last updated 21st October 2011.
Here is a link to the full survey including the IFAs comments, which should hopefully give a full picture. My personal feeling is that the debate if far from over
Amongst a more forensic approach to the results, the one from Nick Bamford caught my eye and I felt it worth an airing
Nick is passionate about what he does and why, as are we at PanaceaIFA and I am pleased that Nick agrees that “there is no one way to do this”.
This is clearly illustrated by comments made by a number of IFAs in their responses to his analysis such as “We need to get the message out beyond the reach of those already well served by advisers.” or “the FSA were quite happy to use only 20 interviews when looking at “Fees and Commission” in their CP121 study”.
Nick is well known in the industry and is I think it fair to say very pro RDR. His observations follow
The results are in bold and his comments follow them.
1. Over 93% of IFA clients do not understand what the RDR is and the benefits it is supposed to bring them.
So what? Isn’t it about time that the intermediary world recognised that it is the role of the IFA to educate their clients about these changes?
Why do so many feel that it is someone else’s responsibility (the FSA) to do this? Is it simply laziness or do they lack the skill set and energy to do this? Are the authors really saying that IFAs are so poor at communication that they can only explain the RDR changes to 7% of their clients?
I doubt this very much and feel it is more likely that the IFAs responsible for these clients have simply abdicated responsibility for this educational process.
2. Only 20% know and understand that they will have to personally pay for IFA services with no commission option being available.
This kind of statement worries me greatly. It suggests, if you read between the lines, that commission is somehow a “no cost” option” to the consumer.
This has been the historical problem with commission (even post the disclosure regime introduced in 1995) not that it distorts or introduces product or provider bias (there is little evidence of that) but that it has been used to miss-lead consumers into believing that “someone else pays” (the product provider).
Clients always personally pay whether via commission, fees or adviser charging.
Secondly the myth is perpetuated that the abolition of commission means that the client has to pay fees (I accept the word isn’t used here, it is later on, but you can see the thrust of the statement). Rubbish!
Adviser charging is a method very like commission where the cost of advice is paid from the recommended financial product. The advantage is that it is an amount agreed between consumer and adviser and thus the consumer has the chance to determine whether they get value for money or not.
An IFA post RDR who wishes to continue to operate on a speculative basis where they only get paid if the consumer buys a product, is perfectly at liberty to do so.
3. Alarmingly, 85% of IFA clients do not understand the difference between the new interpretation of independent and non-independent advice
So explain it to them then! Again, why is the author so surprised about this and what are IFAs doing to explain the advantages and disadvantages to their clients?
If the IFA seriously wants to engage with their clients to explain this subject then there is plenty of source material available (including papers from the FSA website) if they are prepared to put some effort in and do so.
4. 61% of IFAs need help in educating clients about the impact and effects of RDR
At last here is the crux of the matter. It isn’t that clients don’t understand the RDR but that 61% of IFAs don’t understand the RDR.
There are massive amounts of help available, not least via BrilliantWithAdvice. Again we need to ask what are IFAs doing about getting the help that they need?
5. Not surprisingly 93% of IFA clients would prefer a commission choice remain available to allow the client to decide which remuneration model suits them best.
Of course we don’t know what they were asked. Were they asked “would you prefer to pay for advice by commission which doesn’t cost you anything?” or “would you prefer to pay for advice by a fee from your bank account (unknown quantity) or by a small amount deducted from any product you buy?”
Without knowing how the question was phrased how can we tell how the client determined his/her answer?
Again, note that adviser charging employs the same methodology of deducting the advice cost from the product as commission does
6. Amazingly only 1.1% if IFA clients see qualifications as being valued most. Face time and experience is what matters according to 90%.
And yet this “experience” has no definition on which we can all agree.
No one would argue with face time as a valuable and again doesn’t the client formulate their answer based on how the value of those qualifications is explained to them?
And why is it that relevant qualifications and relevant experience are perceived as mutually exclusive- why can’t the IFA client have access to both?
7. Only 18% of IFA clients see value in being better qualified
Shame really because if they used these better qualifications to promote their offering they would find like we have that consumers respond very positively to them. If on the other hand you are a product salesperson (albeit ethical and diligent in what you do) you may rightly consider that being better qualified is of little value to you.
8. 61% of IFAs see they will lose clients as a result of fees being the only way.
The RDR is not about “fees being the only way”. Please stop this myth is it any wonder that clients don’t understand what is going on.
If IFAs are approaching their clients (as we have witnessed) and telling them that from now on the FSA insists that the client pays a fee for advice then frankly they deserve to lose clients.
It was George Bernard Shaw who said “"Reasonable people adapt themselves to the world. Unreasonable people attempt to adapt the world to themselves. All progress, therefore, depends on unreasonable people."
So, is Nick right?
Article last updated: Jan 25, 2012
Derek Bradley, CEO
Sarah Paul, Marketing Director
James Bradley, Head of e-Relationships
Comments
I'm not quite such a client hugger as Nick and don't feel it's my place to 'educate' anyone. I seek just to lay out the facts and the options and discuss an agreed path to a suitable outcome. All this talk of regulation and rules with clients just gets in the way - and as I have said before they don't really care anyway. To put this in context (if it is of any interest) I have several clients who are Judges. One is a Lord Justice in the Supreme Court and his view on our red tape and regulatory process are largely unprintable. He isn’t interested in the regulatory detail – he just wants the job done and understand agree the charge.
I do so very much agree with Nick on the matter of Adviser Charging. This in my view has been purposely ignored and distorted by those just too obstinate to engage with the concept. Again as I have said before the majority of clients would be hard pushed to define the difference – always presuming that there has been clear and open disclosure on commission in the first place. And this is the major point. I very much suspect that many of those objecting most vociferously are precisely the ones who are less than clear on what their ‘cut’ is under the commission system. How many would tell a client that for a £90/m FIB over 12 yrs. for a 51 year old male they would trouser over two grand! Outrageous! No wonder they like commission.
Existing competitive rivalry between suppliers
Threat of new market entrants
Bargaining power of buyers
Power of suppliers
Threat of substitute products (including technology change)
Now read this into our Financial Services Environment post 2013.
1. Is the entrance of 20,000 IFAs looking directly for market share within the NMA HNW or top 1% of public seeking advice, with wholesale discounting of the adviser charge, rendering it a commodity instead of a "service"
2. Is the consolidator, the passporting IFA from the EU, the reversal by product providers into direct selling and probably a whole host of others jostling for market share
3. Is the client himself. "Why should I pay you £150 per hour for advice when a CFA down the road will charge me £50?" Perhaps your costs are too high and based on "Old Model" profitability. NO client is forever as Saatchi and Saatchi found out to their cost when they lost the British Airways account in the early nineties.
4. I could go on here... direct to market, no advice sellers, you name it they will all want a share and will be able to provide it on a volume basis.
Small to medium size IFAs with say 150 "real clients" will not be able to maintain momentum. Costs in the back office will spiral and profitability will sink like a stone. The consolidators alreasdy know who the wounded, weak and feeble will be. There will be blood spilt.....
Or am I wrong?
Anyway in response to Callomon 1 – yes you are wrong. Of course there is competition. Have you only ever worked in Financial Services? Believe it or not, not everyone goes for the cheapest option. You may eat at McDonalds and drive a Fiat 500, but many of us don’t.
Moreover if a client ties to bargain with me I don’t waste my time or theirs – I just show them the door. I judge my charges to be fair and I don’t operate in a Persian Market. If someone wants to do it cheaper they’re welcome. Either my services are valued or the aren’t. Not only is life too short to worry about it, if you take on clients like that you will probably increase your chances of attracting complaints.
Contrary to your beliefs there is no shortage of those willing and able to pay a fee – either by cheque or via adviser charging. As others have said already adviser charging is not hard for clients to understand and I have yet to come across anyone who dislikes it. Sometimes it can be very cost effective – particularly for pensions. You must be doing something very wrong if you are encountering difficulties.
The five forces you set out aren't quite accurate - but anyway, the core point of Porter's Five Forces model is "to analyse the competitive forces that determine industry profitability". Clearly the strategic analysis works wildly differently depending on whether you are considering the manufacturer industry or the adviser industry.
Looking at things from the point of view of an IFA firm:
1. Bargaining power of suppliers : if my supplier is a product or service provider then RDR changes the scene dramatically as commission and other inducements cannot buy my attention any more. Their bargaining has to be done differently now and it's already clear that the power of the "old model" product providers has already diminished.
2. Threat of new market entrants : by which I mean new IFA firms - yup - could be a threat, if there weren't already more than enough clients with more than enough wealth wanting advice from too few firms - so, enter the market all you like - there's 4 x as many accountants and 4 x as many solicitors as IFAs and they seem to get along quite nicely.
3. Bargaining power of buyers : it is well recorded that buyers of professional services in general do not bargain in the same way as other buyers - mostly because it's a professional service, closely linked to knowledge and expertise and highly correlated to a trust based relationship - which can't be reduced to something you haggle over.
4. Threat of substitute products or services : well, maybe that's another IFA with a different / better service, or maybe its Hargreaves Lansdown with execution only, or a provider / platform going direct to consumer - but again marketing in professional services is highly dependent on trust and referral and not like changing my soap powder or gas supplier - and barriers to entry in the regulated community are significant, getting higher, and not quick to break through.
5. Rivalry among existing firms : given that there's more than enough clients with more than enough money to demand an advice service that is profitable to deliver, and not enough advisers, or even more precisely, more than enough clients for me, then frankly what's there to fight over??
I'm not saying who's right or wrong - just that there's a number of ways to do the analysis, some of which could, with a different start point and with different emphasis on different factors, be considerably more positive than the earlier one.
Gillian: flattered to be dissected but I suggest that whilst in current climes there are more than enough clients to go around, adviser charging, by the very fact that it has been shown that post rdr a client values an IFA at £70 odd an hour, that the bancassurers will be wringing their hands with glee. A model has to change, we just know this FS model, based on service values is rapidly becoming commoditised. Life assurance is one aspect. Stakeholder basic advice is another.
Supplier bargaining will still be around, irrespective of the way providers incentivise their market share. They all have to make a profit, however I cannot see an environment with 28 platform providers (at last count)
I take the point on preofessional services that are based on trust etc. I'm afraid that is a dangerous point of view. Saatchi and Saatchi thought that BA was bomb proof... until they lost it. No client is forever in whatever industry one is in. Competition sees to that and one can be as nice as pie to ones clients, service them to death and so on. It just takes one entrant to put doubt in the clients mind. Thats the nature of a service business; it just is.
One thing is for certain, the air will be cleared on 1/1. Those with the assumption that their clients are "Bombproof" will smell the coffee.
But I appreciate the fact that my MBA wasn't wasted and that I still remember some of it!! (Don't get me started on Mintzberg, Greiner and Slattery!)