Blogs

October 2011: Restricted vs whole of market - time to reconsider?

For too long the arguments around IFA v Restricted Advice (or multi-tie as we used to call it) have been dominated by a ‘four legs good, two legs bad’ mentality.  It’s been almost impossible to hold an intelligent debate on the subject and any IFA who put their head about the parapet risked it being shot off!  It’s time we drew a line under this adversarial approach especially since Restricted Advice needn’t look anything like multi-tie.  First of all, Restricted Advice is simply anything that isn’t whole of market.  Secondly, the accusation held against those who eyed up multi-tie that they were simply commission junkies is no longer true – Adviser Charging has put an end to that.  I could add a third which is that increasingly many IFA businesses operate in a way that doesn’t look a whole lot different to a Restricted Advice firm.  Just compare the proposition of an investment focused IFA that uses outsourcing to that of a leading proponent of Restricted Advice, St James Place.

Our analysis of both advisers and consumers highlights some trends that mean advice firms should at the very least be asking the question – is Restricted Advice right for at least part of my client bank?  Those trends include IFAs moving upmarket and discarding unprofitable clients, reluctance amongst the mass market to pay the levels of distribution cost embedded in traditional investment products and the emergence of direct and online offerings.  Many IFA firms will rightly conclude that they should focus on the mass affluent and high net worth with a single whole of market proposition.  But that leaves the question of are they missing a potential revenue stream, or perhaps more importantly, are they cutting themselves off from their future customer who may not be able to afford, or need the services of an IFA today but who may do so in future by which time they will have established relationships elsewhere?

So it’s not ‘evil’ to consider Restricted Advice whatever the opponents may say; it won’t be right for many advice firms but it’s a question that needs to be asked…and answered.

FSA and product intervention - should alarm bells be ringing?

With all the focus on the RDR it’s at least possible that you missed a recent publication from the FSA – DP11/1 – Product Intervention.  This was published in January but appears to have had next to no coverage in the trade press nor has it provoked any great debate.  Possibly this is because it isn’t about the RDR or perhaps because it’s a Discussion Paper which is the ‘entry level’ so far as any prospective FSA regulation is concerned. 

Well here are a few words from the Forward by Adair Turner which might cause you to move this one on to your personal radar screen…"[this paper] proposes a quite new and more intrusive approach to the regulation of retail financial services”.   

If this doesn’t start raising alarm bells then the DP goes on to say that “Our new strategy signals a decisive shift in our tolerance for the amount of actual harm or detriment we are prepared to allow to happen – our ‘risk tolerance’.  Firms will see increased supervisory and enforcement focus on their product governance processes. We expect to see general improvements in product governance across the market.” 

Now we’ve had TCF for a while and you may think that this takes care of ‘product governance’ but clearly the FSA doesn’t think so.  If implemented this DP has major implications not only for product design but also for how products are distributed and the supporting marketing communication.  You have been warned!

See the Discussion Paper at http://www.fsa.gov.uk/pubs/discussion/dp11_01.pdf

David Burns, Executive Director, NMG Consulting

The Jekyll and Hyde approach to risk delegation

Over the past few years we’ve seen quite a shift from IFAs picking individual funds towards ‘risk delegation’; that’s making use of multi-manager, multi-asset funds, DFM, model portfolios and the like.  The trend seems pretty clear with more advisers questioning whether it’s smart or indeed believable to position themselves as investment managers.

However I’m a bit puzzled by how some advisers seem to be approaching this.  It seems to me that if you buy into the rationale for risk delegation then surely you’d follow this through your entire advice process but this doesn’t seem to be the case.  Yes, there are advisers who risk profile, asset allocate and then put their clients in multi-asset funds that are regularly rebalanced.  But there are plenty adopting a Jekyll and Hyde approach. 

They risk profile, asset allocate and make use of a model portfolio…so far so good.  So logically, come time to review the client’s portfolio, you’d expect them to go through the same process and re-balance back to the original asset allocation…wouldn’t you?  After all, if it’s the right approach at the outset, it must make sense to do so come review time?  However, often they shy away from this citing the age old defence of ‘the client doesn’t want to sell winners to buy losers’.  So having spent a lot of time explaining to a client why they don’t make calls on the market, that’s exactly what they are doing, if only by default.

Post RDR it’s going to be essential for IFAs to clearly articulate their proposition, especially so for ongoing advice where Adviser Charging will replace fund based commission.  If you’re a risk delegator, make it a key part of your proposition, believe in it 100% and be prepared to explain to a client why it’s got absolutely nothing to do with selling winners and buying losers.

David Burns, Executive Director,  NMG Consulting

For a large part of the past three years I’ve listened to IFAs telling me how the RDR was a complete ‘stitch up’ for the banks.  Given this it must have come as a surprise to many of these that the first big RDR casualty was not an IFA firm but Barclays Financial Planning.  Well it may have been a surprise to them but not to me.  I’ve long argued that implementing an Adviser Charging model within a retail banking environment is far more challenging than as an IFA. 

The demise of Barclays does raise the question once again of who is going to provide advice to the mass market.  Surely it’s time for IFAs to consider the merits of running an alternative business model alongside their core IFA business to service consumers who otherwise may not have access to advice.  Over the next couple of years we are going to see a number of alternative models emerge that could significantly reduce the cost of providing advice.  I know that many IFAs simply cannot contemplate offering anything other than whole of market advice but if Barclays is prepared to think the unthinkable, maybe it’s time that IFAs did too.

David Burns, Executive Director, NMG Consulting