It’s a whole new world out there for the financial adviser who is willing to evolve his practice. Many advisers will tell how they have spent years perfecting their sales skills. No longer content with a compelling sales technique, the adviser of the future needs to create and, more importantly, constantly validate a value proposition that is beyond fault.
The rumblings of the new era started in 2002 with the publication of the FAIS Act, followed quickly by the Statement of Intent in 2005. Fast forward to 2016 and there is nodoubt that the Retail Distribution Review (RDR) is going to fundamentally change the face of the industry. Far from a tick box exercise, the RDR will have a profound impact on product development, innovation and systems, which will provide business with an opportunity to reassess their distribution models, product design, IT systems and general business capability. Ultimately building a business that is well positioned to move forward into the new era.
The RDR discussion paper, released in November 2014, outlines a total of 55 proposals which it suggests will be implemented in a three phase approach. The first phase, implementing 14 of the 55 proposals, will address aspects such as product supplier influence, commission anomalies and equivalence of reward, whilst also addressing the key concept of adviser categorisation. This, in turn, will require structuralchanges to distribution models, placing greater responsibility on product suppliers to ensure delivery of fair customer outcomes. Innovation designed to effectively address conflict of interest, maintain a competitive edge and enabling a self-directed, advice driven sales force will secure a successful paradigm shift and an “out with the old and in with the new” approach to business.
Rumour has it that the far reaching changes proposed by the RDR will see financial adviser numbers drop significantly, that clients will be reluctant to embrace the concept of advice fees, and will thus go direct for their insurance needs, contributing to the increasing advice gap. With every risk, however, is an opportunity and for the financial adviser who is willing to evolve his business, the future has never been brighter. Perhaps in the words of Socrates, “The secret to change is to focus all of your energy, not on fighting the old, but on building the new.”
The advisory relationship is complex and demanding. Based heavily on trust and reputation, the decision to engage the adviser’s services are reliant on emotive factors as wellas historical performance, recommendations from other professionals and qualifications.
Clients will question whether a financial adviser really understands their needs, as well as demanding a differentiated service that cannot simply be obtained online or via a call centre.
Easy to access, and promising to cut the middle man out in what is traditionally a grudge purchase, added to tight economic conditions, clients are in danger of not even realising what their needs are. A non-existingcomprehensive financial needs analysis and single needs selling could result in dangerous shortfalls.
Added to this subjective assessment is the fact that advisers are unwittingly competing against the newest player in the market – the robo-adviser. Sounding slick and sophisticated with a compelling futuristic title, the robo- adviser is a sales process driven by an automated webof decision trees. However, the robo-adviser is far more than a financial calculator. The term robo-adviser implies in itself that an element of advice would be retained in the process but without the intervention of a traditional (human) financial adviser.
A robo-adviser, in its pure form, provides a certain degree of advice, although on a more limited basis, and such advice would assist a client in making certain financial decisions. Attractive especially when markets are performing well and returns are solid, the model is likely to be favoured by the younger tech dependant investors, enabling an anytime, anywhere opportunity to transact.
Product suppliers need to carefully consider how they distribute their products in the RDR world, and perhaps a robo-advisor will assume the role off a sales enabler rather than evolve into an additional distribution model. However, to truly gain maximum benefit of the robo-adviser model, clients need to understand that this model may simplify the investing process, but is unlikely to be able to replace the holistic advice given by the traditional financial adviser, even if it does only lack the personal touch. By its very nature, the scope of the robo-adviser is limited and unlikely to usurp the financial adviser.
Brian Foster, founder of Brian Foster Coaching & Consulting says, “The problem for advisers is that this isn’t really a regulation problem, it’s a business model problem.” RDR raises a key two-part question: how do we persuade clients to pay for advice, and how do we make it profitable? The opportunity to critically assess the current operating model, provides the ideal occasion to determine the success factors for a sustainable practice. This is where the value proposition becomes critical: what are we selling, who are we selling it to and at what price?
Moving from a commission-based model to a fee-based model comes with its own set of complications and cash flow is only one of them. Having that initial conversation with a client can be awkward and requires a solid belief in skill, professionalism and value proposition.
A fee- based model can have the upside of mitigating the risk of commission claw backs and reducing the possibilityof clients not taking up the product recommended after the time has been spent researching and completing the financial needs analysis. Advisers who choose to embrace this model sooner rather than later will be more likely to transition successfully.
A growing annuity income will mean that their business will be more resilient to cash flow problems as research shows that clients are more likely to favour a fee model which charges on a per task basis. It is estimated that cash flow challenges accounted for as much as 11 percent of the reduction in financial adviser numbers in the UK, post implementation of these changes. More importantly for the adviser of the future, the critical success factor lies in building a sustainable practice with a solid value proposition and an appropriate pricing model.
RDR is well established in the UK, so it serves well that we can draw some valuable lessons from theirexperiences.
First and foremost, we must remember that in South Africa we have seen a more staggered evolution of the financial advice market. Minimum standards of professionalism are now widely accepted as the normin the industry and have already raised the bar, resulting in more comprehensive financial planning and improved advice to clients. This result aligns well with the Financial Services Board’s (FSB) stated intention to enhance professionalism and improve customer outcomes.
However, professionalism and quality advice come at a price, one which the South African customer is not used to paying for. This could mean that a large portion of customers are priced out of the market, as a result of a reluctance to pay for advice.
All while the same result can supposedly be achieved by an online purchase, or the view that in tough economic times financial advice is a grudge purchase which can be pushed further down the list of priorities. Either way, the potential result is an increasing advice gap which could easily become a vacuum, defeating the very intention of the RDR.
The net effectwill only be seen when the client lifecycle runs its course: the uninsurable middle-aged client who neglected to take out critical illness, disability or life cover whilst young and healthy, the client who faces retirement with insufficient capital to meet his needs, or the dependants who are left without provision on death of the breadwinner.
Many firms have adopted a wait and see approach to what will actually be required by the RDR, however one thing is clear: a clear change in business activities in the UK was evident: a move from pushing a product into the market, to a clearly defined focus on financial planning. Product suppliers offering an effective financial planning platform to the financial adviser recorded a successful transition with product sales being an obvious next step.
After all, the very first desired outcome stated by the RDR is its intent to support the delivery of suitable products and provide fair access to suitable advice for financial customers.