The RDR deadline is fast approaching and yet, according to the Association of Independent Financial Advisers (AIFA), up to a quarter of advisory firms are still unsure as to whether or not they will be compliant. Now, to my mind the issue of compliance is a very important one, but I think there’s actually a bigger issue at stake. Will the RDR business model actually facilitate the type of change it’s designed to deliver? Or will a RDR Mark 2 be on the cards, in the very near future?
If we recall the original aim of the RDR, it’s about promoting greater choice for consumers, offering greater access to information, so that informed decisions can be made about long and short term financial objectives. Yet all the wit and the wisdom in the run-up to these changes demonstrates a yawning chasm between adviser and consumer expectations. Take the cost of advice for example. Or rather, how transparent is the cost of advice?
There’s no evidence to suggest that the current cost of advice is unfair or inappropriate. However, going forward, consumers will begin to pay for advice directly, rather than it being funded from their premiums. They will become more aware of how much advice is costing them, and advisers will need to explain and break this down more comprehensively. Given the current financial belt tightening and the poor service levels around financial products, it’s likely that consumers will have less appetite to spend, especially if the net benefit is not sufficiently tangible.
Research from CoreData and YouGov has revealed the gulf between what consumers expect to pay and what IFAs want to charge. Consumers say they are prepared to pay around £150 for a full financial review – whereas IFAs believe consumers will need to pay around £500 per hour for advice post-RDR, and national IFA firms and high street banks are expected to charge £200 or more per hour.
Currently, the charge for existing fee-based IFA’s is from a mere £50 to £150 per hour. It’s not unusual, according to advisers, for complex advice to take up to two full meetings or around six or seven hours. As we can see there’s a big difference here and the RDR does not prescribe how to address this challenge. So how will this gap be bridged?
A Chance to Deepen Relationships
I think the answer lies in the guided sales route. Recent estimates show that around a quarter of IFAs are currently anticipating using this model to ensure RDR compliance. The Association of British Insurers (ABI) estimates that this new distribution channel could help to deliver investment products to 14 million people, including annuity products to 10 million people and protection policies to 11 million.
The FSA, too, believes that guided sales is one route that can help to promote greater choice for consumers – but, as you’d expect, the regulator’s rules are not hard and fast, and this is a possible reason why IFAs may have approached this route rather tentatively.
It’s worth spelling out that there are two routes to guided sales: non-advised and advised. In the first instance, consumers will get access to more information than just ‘execution-only’ sales, so they should be making more informed decisions. In the second, if they get to a point where they feel the information available is insufficient, this will take them back to the traditional advice channel. This model will make it clear to consumers what they are paying for – thus helping them to appreciate the charges for the service.
But what’s really important to note about guided sales is that it’s about so much more than a route to a straightforward sale. It’s also a mechanism to provide information, increase choice, deepen the relationship with the customer and ultimately, and build trust. Of the two models for guided sales, non-advised and advised, the latter is the one that has the greatest potential to build a long term, loyal customer base. And with this comes the opportunity to return to a more fulsome approach to financial planning.
The DIY Alternative
Whilst the credit boom of the 80s might have curbed the nation’s savings habits, the financial crisis and the coincidental surge of new media have actually increased consumers’ appetite for financial self-governance. Online forums bear witness to great numbers of consumers swapping tips about a host of financial products, from annuity rates to this year’s best ISA rates.
Vast swathes of consumers are already accessing direct channels, whether it’s online or mobile banking, or re-mortgage calculators, to make financial purchasing decisions. Whether these are chat forums regarding financial loans or pensions, many are tuning into the dialogue of their peers for advice about financial products through social media and online services. And it isn’t just the young that are tuning in, it’s everyone. The IABUK reported that 1 million UK residents aged 55 and older went online for the first time in the year to April 2010.
A recent Nielsen survey shows that when making personal finance or investment decisions, 49% of all global online consumers rely solely on their own judgement, while 20% of respondents seek advice from a financial planner/adviser and another 18% rely on friends, relatives and colleagues for advice.
Higher Earners DIY It Too
While IFAs with high-earning clients might think that their territory is safe with a customer group that’s content to pay higher fees for advice, research reveals there’s also a growing trend for high earners as well to take more direct control of their own wealth. According to YouGov, IFAs serving clients earning over £100,000 a year have more than halved since 2008, while almost 70% of individuals earning less than £60,000 per annum use direct channels to track their finances. What’s more, among those earning between £60,000 and £100,000 there’s been a 20% increase in the use of direct channels.
For those targeting high net worth individuals, competition is only going to get tougher. Not only are IFAs pitted against national advisory firms: the banks are also positioning themselves for a share of this market – as are the new kids on the block, the likes of M&S and Tesco. New players will no doubt capitalise on the leverage from their existing brands, and from the fact that consumers will expect them to be more transparent and fair.
In fact it’s clear that, for any chance of success with consumers, a track record will play a key role. This bodes well for IFAs: a recent Skandia survey highlighted that over a third of the millionaires it polled believe that IFAs are a trustworthy source of advice. However, it’s unlikely that HNW individuals will let their advisers rest on their laurels, because clearly they too will want to invest wisely.
In the same way that commoditisation has changed the way that consumers purchase products like travel insurance, guided sales has the potential to open up the market for personal financial products.
Guided sales will also take the sting out of the transparency of costs, as it will be clear for consumers to see exactly what they are being charged for. And with such an explosion of the market, there’s surely room to increase revenue streams. Although each customer might not attract the fairly high fee levels that some IFAs anticipate from direct sales, they’ll be tapping into the vast mass affluent market, which is by far the UK’s fastest growing sector.
The guided sales route has much to offer the ticking pensions time bomb as well. Around half of the working population – around 13 million individuals – are currently failing to save sufficiently for their retirement, and we think that the guided sales route has the potential to encourage savings – rather than seeing people walk away, due to resentment over ‘high’ fees.
In all, guided sales present a real opportunity for IFAs to re-focus their energies and grow their customer base. I think the numbers of IFAs considering this route should (and will) eventually be higher than the estimated 25%.
If they choose to ignore guided sales, IFAs will find themselves competing in an increasingly saturated market against stronger and possibly more agile competitors, and serving consumers whose appetites have changed from taking advice to actively seeking and managing their own destinies. If they opt instead to embrace guided sales, they will have not just a chance to ‘hang on in there’ but to grow their businesses for the better.
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