How Advisers Should Spend Money to Make Money

Lee Travis: Hello, Emma.

Wall: So, your business helps to educate and develop financial advisers' businesses. So, you are on the ground talking to financial advisers all the time?

Travis: Yes.

Wall: What have the impacts of RDR been?

Travis: Based on the feedback we get – and we've been working very closely with advisers over the last five years or so now – the opinion is definitely divided into whether this is going to be a good thing or a bad thing. We have advisers that say nothing has changed, business as usual; and some say turnover is up, some say turnover is down but long-term, overall, people are quite optimistic that this is going to be a good thing for advisory practices and I'll be inclined to agree with them. But there are some negative things, some positive things that have come out this.

First of all, from a negative perspective, we have seen a reduced amount of advisers, so we've lost thousands of advisers due to the run-up to RDR, which can only have a negative impact on the clients that they were servicing and to lose that kind of experience is a great loss for all of the professional, as a whole.

Through adviser charging we are getting feedback that consumers are being priced out of the market. So, commission has its critics, for example, but also some people are very, very pro-commission. Historically, clients have been happy to pay commission. But I think with a new adviser charging rules it means that some will be unfortunately priced out of the market, which is a great shame, because certainly we've got such a huge advice gap out there, the regulators are very much focused on this at the moment, but it certainly doesn't help things.

But positively, we've seen a shift in power. So, historically, product providers have been in control with what advisers have remunerated, so the shift in power is now towards the consumer. But also advisers are very much in charge of their own destiny in that respect.

People – because of RDR, people have kind of put the spotlight on their practices. They are very much focused around profitability, very much focused among the long-term sustainability of practices. Looking at systems sort of make sure, they kind of streamline in place, so any kind of savings that they can make it due to efficiencies, they can of course parcel those kind of savings as consumer, which is a great thing.

So, people are generally kind of revaluating their process to make sure they are more streamlined. If anything hasn't changed luckily, it's the passion from advisers to continue that they look after their clients very, very focused on this, very, very passionate about it just to make sure that they continue to help people. That's helped people either save money in their capital gains, tax bill, inheritance tax, the achiever kind of goals and ambitions and their kind of dreams in life but also protect families and that kind of passion definitely hasn't changed since RDR has been implemented, which is a great thing.

Wall: And for financial advisers that are still around, that have survived the transition, what are the biggest challenges facing them today, especially those smaller financial adviser businesses?

Travis: The challenge is to manage the business on a profitable, sustainable basis. Bear in mind, we're just going through arguably the biggest change that we've witnessed in financial services. We've got an increased cost of regulation. So, of course, advisers have to kind of take that and cost burden on without hopefully kind of passing those kind of costs on to the consumer. The charge, in short, just changed now so we've got the instruction of adviser charging. So, advisers are reengineering the business model to make sure they are not just focused around earning money when they implement business.

So, the FCA have done some recent reviews just to see how adviser practices are getting on post RDR and one kind of challenges facing IFA just to make sure that they are paid accordingly, because IFAs deliver a huge amount of value to the consumer. But it's good that they are paid throughout the process whether to take our product or not. So, there is different kind of solutions out there. But I think the fact that they reengineer their business model so they aren't getting paid when they actually – or when clients take our product is definitely a challenge to face at the moment.

Also servicing clients with small portfolios. We get feedback and IFAs will say I just can't justify charging I would normally charge to clients for the small portfolios. So, due to the nature of advisers they want to help people. They generally have a passion to helping people. So it's a bit of a moral dilemma as to what to do with those kind of clients. Ultimately, the decision has to be commercial. But you can have more streamlined processes, and just say, look, I'm going to be around for you when you need me, which some of the clients really value, just to know that they're going to be around.

Trading independently also is – that's a challenge at the moment. Remaining independent is something that advisers have fought for tirelessly for a number of years, to be fair, and that's understandably so; it's a very emotive subject. But we've grown roundabout 10% of the adviser community now operating on restricted basis and more advisers are now thinking, well, maybe I can move to that restricted basis and offer a pretty much – a very similar to – a similar service to what they were offering pre RDR, under the old terms of independence. And so the consumer isn't necessarily being disadvantaged by it. But because they can operate more efficiently, that can be arguably passed on with regards to the charges that they levy for the clients. 

So just in short, the processes are compliant, they're robust, they're effective, looking to treat or review legacy business, should I say. So, there is a substantial chunk of business coming through that are entitled to, which the regulators now are looking at to say, well, potentially we may have to stop this at some point, which is going to be a concern for the sustainability and longevity, so there are challenge around addressing that option and make sure if there is revenue coming through from adviser, they deliver a level of service according to that so the customer still benefits from it.

Of course, reducing cross-subsidy, so they can look at the revenues coming in, so, right, okay, I get this much from this client up here; I didn't realize they got so little here. So they are now saying, well, I can't afford to continue service and the clients aren't paying us enough, because arguably the cross-subsidy means the people have been generating more revenue; meant that we can offer a service to kind of the lower-end clients, if we can say that with respect.

But I think that that will now go. I don't think they'll have to eradicate cross-subsidy. I don't think they'll ever get rid of that at all. But the regulator is very much hot on it at the moment and I think it's the right thing to do, to be fair. But we can talk about the challenges IFAs are facing, but there are also great opportunities out there too.

Wall: I mean you touched a little bit there about how to make these sort of challenges into opportunities; what efficiencies can financial advisers implement in order to do that?

Travis: Okay. There are certain key areas, but a lot of the keys are around technology and processes. So, if you got a process in place that are end-to-end that are integrated with other sources you may use for your advice process and they kind of involve any kind of duplication then that will also mean that you've got a fitter and more kind of slick business, and advisers are currently reviewing those at the moment and a lot of them make great process – or progress into that as well.

I mentioned the segmentation as well; that will certainly help with efficiencies. Outsourcing the areas of non-expertise, so the expertise of an adviser is to make sure he implements financial plans for clients. That's ultimately what it is. The relationship is very much with the client; not to be seen as a relationship with the client's money, which is an important point to make.

So, when it comes outsourcing those non-expertise, we're talking like compliance investment process, looking at multi-managers, looking at model portfolios, looking at discretionary fund managers, and also administrators as well, more are investing into the back office staff to ensure the advisers can spend more time with the clients, which is what the clients value in essence. So, the more time they can spend with the clients, the more they can help them, the better the outcome is for the consumer on the whole.

Wall: So, do you think then it's sometimes a case of just spending a bit of money to save some money?

Travis: Yeah, very much so. If we look at old models and then we look and say, well, we need more advisers, we need more advisers, but the new model now is looking at, well, I need to kind of build my infrastructure in place. So I've got more administrators to see all the kind of work behind the scene, which is crucially important, but I want to spend more time with clients because it helps me generate business and helps me look after my clients on a much better basis.

Wall: Lee, thank you very much.

Travis: You're welcome. Thank you, Emma.

Wall: This is Emma Wall for Morningstar TV. Thank you for watching.