Cart Before the Horse?

Cart Before the Horse?
Simon Evans, Lead Consultant, RDR

A bright new age, driven by innovation and new technologies, beckons to us all: No longer do we need to trudge down to the restaurant, or evening classes to learn a new language, or queue for hours for tickets. The internet, mobile communication, and other frankly amazing new ‘star-trek’ devices have changed every aspect of our lives

So too in business, specifically, (since that is where I am expert), the Financial Services sector. It is in the midst of unprecedented change. Indeed, it would not be wrong to say this is a transformation that is under way, and the landscape will not be recognisable in a few years.

We are familiar with the impact RDR will have in just over 24 Months. IFAs are already assessing its impact, and devising ways of meeting all the (sometimes conflicting) stakeholder requirements. Wrap platforms are viewed as key to ensuring that independent advice is given in an efficient and cost-effective (and technologically advanced) manner, and there are a wide range of Wrap offerings available to choose from. Where early adopters such as CoFunds, Standard Life, Transact, Fidelity led the way, Barclays will follow

But have they been rewarded for their efforts? Early investors in innovation traditionally and justly reap the financial benefit of their trail-blazing. They made all the initial effort, after all, and they were far-sighted enough to study their market place, see the need, and act to fill it. Given today’s announcement of Macquarie exiting the UK wrap provision market, due to ‘challenging’ business conditions, what are we to think?

In the context of the UK, the demand is massive, and Macquarie folding is particularly puzzling as the size of the potential Wrap and Platform market is estimated at £1.8 trillion of assets and so far all platforms combined total just over 100Bn.

This leaves a huge potential market still available as the Wrap and Platform development in the UK is still in its early stages. So there is more than enough business to go round.

I would guess "execution challenges", another cited reason given by the company, is the real key in this case, as this would indicate a failure to deliver despite high start-up expenditure, and hence reduced business volumes.

Time and time again it has been proved that large reserves, inducing vast expenditure, are not a recipe for success. AMEX, Lifetime, and now Macquarie (not to mention many expensive false starts by other providers) go to prove my point.

In fact, good business management, good systems and delivering a service that meets market expectation are what are essential, and not merely the ‘jump on the bandwagon’ ethos, the ‘dazzle them with lights and mirrors’ adoption of new technology.

Innovation for innovation’s sake does not work. Due diligence, with it’s implied study of the market, and of technology, with a clear view of their aims and ambitions are as important as the resources (money - yes, but crucially the right people, too).

The news of Macquarie’s demise is already resulting in scepticism and caution: IFAs are watching to see who will be next. Do Transact, Ascentric , Novia and Nucleus have a firm enough footing to weather the turbulence before technology is outdated and the solvency rules catch them out? Are their sponsors’ pockets deep enough, and are they patient enough to stay in the market? And will IFAs thank their stars for a wake-up call to properly investigate the provider they sign up to? Some providers have indeed spent time and money in developing a sound business model, together with an understanding of the Wrap market, and will succeed. Others won’t be so lucky.

So yes, technology is amazing, and we live in exciting times. But there is need too, for the old-fashioned stuff: common sense, diligence, caution and the long view.

The Silver Lining

The Silver Lining
Simon Evans, Lead Consultant, RDR

RDR is coming, and as the deadline approaches, talk everywhere is of the problems and confusions it will bring. A recent survey by JP Morgan of over 200 Wealth Management firms revealed that:

• Fewer than half say they currently meet the RDR's definition of independence and can advise across the full range of retail investment products.
• 30% expect outsourcing of wealth management by IFAs to increase significantly
• 43% of wealth management firms expect the cost of implementing the RDR to be high, or very high
• Most believe the cost of RDR is to be met through reduced profit margins, lower staff remuneration, and higher client charges

There are plans by some firms to look at ways around the need to conform. There is a growing trend of UK-based IFA firms looking to use 'passporting' to benefit from the regulatory regime of a different country as RDR draws closer.

Faced with a threat of extniction after 2012, the opportunity to continue advising in the UK from a foreign base is a tempting proposition for those who are unwilling or unable to conform to the RDR's requirements.

But why not look at the positives?

Professionalism: The past 18 months have challenged traditional thinking about investing and asset allocation, diversification and correlation. Wealth managers must now be prepared to respond to clients' needs to understand, access and communicate with advisors regarding their relationship, products and services. And advisors must have sufficient information from objective sources regarding all products and services, to answer questions regarding performance and degree of risk.

The advent of RDR is prompting a structural shift in value away from old-fashioned providers, and towards the advisor as customer.

Professionalism will increase, though many do concede that the cost of qualifications will be steep and more qualified staff will expect to earn more. Dr Peter Williams, Head of Industry Development at Aegon, accepts this fact, but believes that increased professionalism within the sector is vital.

He states that:'The RDR started off with the right objectives. Two in particular stood out (for me):

(1) To increase consumers' trust and confidence, and (2) Increase the number of consumers using our (provider) goods and (adviser) services. I firmly believe that the move to Level 4 is a step in the right direction and will go a long way to achieving 1. However at the top echelons of advice, Level 6 - Chartered Financial Planner - should be seen as the real goal. All the independent research I have seen and my own academic research, points to Chartered being the level that the consumer expects. This is not to say that all advisers will want to be, or will need to be, Chartered. The future will have various levels of advice and qualification'.

Operational Efficiencies: The issue of requiring transparency, accessibility and performance by clients means IFAs will need to re-engineer their services in order to reduce costs, and may do so using fund supermarkets and wrap accounts, both of which offer real opportunities to cut operational costs.

Outsourcing: Also, more than half of wealth management firms surveyed believe outsourcing of wealth management by advisory firms will increase, with 30% believing it will increase significantly. Solicitors and Accountants outnumber IFAs 5:1, suggesting IFAs will be at an advantage in the professional connections market. 80% of Solicitors and Accountants currently refer clients to an IFA, and both these groups of professionals believe this will increase after RDR implementation. The RDR will encourage more solicitors and accountants to forge alliances with IFAs as professional standards become clearer and more aligned to their own. RDR would raise the IFA's competitiveness in these professional markets.

IFAs themselves widely acknowledge the commercial and client benefits of oursourcing. Most expect to outsource in order to access expert fund research.

Research conducted by Axa recently reveals that many consumers prefer IFA channels to Banks or Accountants, but acknowledge there is a huge difference between preference and reality. Axa believes the contrast between agreement and acceptance is a clear indication that IFAs who are helped to market to new audiences will capture market share, despite concerns about the impact of RDR.

Aviva's research meanwhile, indicates that large numbers of IFAs will leave the industry, while those who remain are likely to adopt business models to service fewer and wealthier clients. As with any dislocation, there will be winners and losers, and it is the fear of losing (in some cases the expectation of losing), that is driving most of the industry resistance to the RDR. The conclusion is similar to Axa's: Customers on the whole will be better off in terms of price, access and performance, and IFAs need help to achieve this.

At the heart of all the changes will be the need for system changes: Extra IT resources, and therefore expertise in terms of design, implementation and training will be in demand. Also, with many IFAs wondering if they will be able to afford to service their smaller clients, the solution may need to be based on technology to be cost-effective. Online support could be the focus moving forward, and wrap providers already provide an online forum to support IFAs, together with IT support and training to ensure their platform fits the IFA's business objectives.

Many wealth managers believe demand for their services will increase, partly as others exit the industry, or are forced tomerge. A number hope that the entire advice sector will adopt a GP/Specialist structure, with generalist planning outsourcing to specialist investment managers.

Certainly the impact of RDR goes beyond the issue of re-training and it's associated costs and disruptions. What will emerge at the end of the implementation process will be a professional, innovative, responsive and accountable body of IFAs, with consumer confidence and growth as their reward.

Postscript: MPs have been granted a three-hour slot for a full Parliamentary debate on the RDR. This follows on from the first half-hour RDR debate MP Harriet Baldwin, a fromer investment manager at JP Morgan, secured last month. Financial Secretary to the Treasury, Mark Hoban MP, caused anger among IFAs during that debate when he compared the current Level-3 minimum qualification for advisors to that of a McDonald's shift worker.

Ms Baldwin's office says the correspondence from IFAs 'has not stopped' since last month's debate. 'Everyday we get more emails and letters'.

'Grandfathering', the appropriateness of exams, and the McDonald's comment are the hottest topics, she says.