Prudential predicts rise in transactional clients

He believes that, while we have already seen changes to the way advisers are approaching their businesses, an even greater shift in thinking is likely over the coming months.

He is sure too those companies such as Prudential will have to ensure they provide sufficient support to advisers in this process, as well as recognising the need to make changes to their own propositions so they fit in with advisers’ new ways of working.

He says: “What we are already beginning to see – and what is likely to increase in the future – is advisers actively reducing their client bases to more manageable numbers, to facilitate the changes that are likely to happen after the RDR comes into force.

“Recent data shows that, while in 2010 the average adviser in the UK had 335 clients, today that has fallen to 210 clients. That equates to a conscious reduction of around 30-35 per cent of the customer base in the last two years.”

Mr Warwick acknowledges that, simply put, advisers will have to review their customer bases and come up with a way of grouping them before assessing the way in which those clients will be charged and the services they will require.

And, for many, there will also be a continuation of this inevitable culling of customer numbers to reduce the trail of customers for whom it is no longer economically viable to continue to provide a service.

“It is quite clear that segmentation of clients will be a key challenge for advisers. If we look at the statistics in the marketplace, we are already seeing the effects of that in the early stages,” Mr Warwick says.

“Even where advisers have yet to do a full segmentation exercise on their client bases, we are still seeing a conscious effort to identify and ring fence their most valuable customers.”

“Even where advisers have a reasonable sized customer base, there are probably a dozen or so clients who provide a significant proportion of the overall income for a typical adviser which advisers need to take steps to retain post RDR.”

As well as these ‘gold’ customers, the remainder of the customer base is likely to be divided into those for whom the adviser is providing an ongoing service and those ‘transactional clients’ for whom the adviser only provides a service as and when it is required by the customer.

Mr Warwick acknowledges that in this latter sub-group, even high end customers may not want to pay for, or need, an ongoing service and, therefore, advisers will need to be able to support a model that will enable them to service their needs on a transactional basis.

He says: “There will certainly be ‘repeat transactional’ customers, those who do not want to pay an ongoing service fee but will engage the adviser at various times as and when they need advice. For those clients, advisers will need to have pricing models that meet their needs. Whilst for clients with ongoing services charges as a percentage of investment funds will be common, for transactional clients this is most likely to take the form of – ‘I will provide you with a financial review for a set price”.

The levels of advice charges in the market are likely to normalise over time. Whilst it’s unlikely customers will explicitly shop around, through normal social interactions they will become aware of typical advice costs and start to question fees which feel out of line with expectations, in much the same way as consumers have developed an understanding around things such as the cost of property conveyance and having a will written.

To help contain the levels of fees they need to charge customers, advisers will increasingly look at where they really add value and where they can effectively outsource parts of their services. Model portfolios are already becoming common and risk profiled funds, such as Prudential’s Dynamic Portfolios, are likely to become a default investment approach – particularly with transactional clients.

Mr Warwick anticipates that offering packaged services at a fixed fee level will become an important model in the marketplace, particularly as advisers come under increasing pressure both from a regulatory point of view and in terms of customer preference.

“Advisers are going to have to realise that, in many cases, models that are based on a customer wanting and needing an ongoing service are probably going to be a long way off the mark. While many advisers may have started off this process favouring a model of an initial fee and an ongoing service fee, transactional services are likely to become far more common, particularly as clients themselves start to question whether they really need to pay for ongoing services”, he adds.

“Advisers could well see themselves falling more into line with other professional services, such as accountants and solicitors, where models are built around activity and charges as and when their services are needed.”

In terms of regulation, advisers will need to demonstrate they are separating the initial advice from the ongoing service, particularly in the way in which these elements are charged. And while advisers may understandably favour an option that includes an ongoing fee, it may be more difficult to demonstrate this is the most suitable option and adds value to the customer.

“It puts an onus on the adviser at the point of the initial recommendation to make a decision on whether this is the type of customer for whom an ongoing service is really going to be in their best interest.”

For Prudential, part of its extensive programme of work in preparation for RDR is to make sure that it offers advisers sufficient support and education, as well as tailoring its own product range to offer options to fit in with whatever model, or series of models, an adviser chooses to adopt. Key to this process is looking at the issue of remuneration.

Mr Warwick confirms: “A lot of the work we have been doing has been around the topic of how we facilitate adviser charging. What we recognise is that it is not our job to tell advisers how they should charge their clients, but rather to provide them with the flexibility in our proposition to support them irrespective of how they choose to run their charging models.”

“We have recently published our adviser charging structures and it has a fairly comprehensive flexibility in combining and mixing and matching initial and ongoing service charges in both percentage and flat rate terms. We are able to service a transactional customer where the adviser is just looking for that first fee. Equally, we have models that can cope with an adviser taking an initial fee as well as ongoing service fees.”

Importantly, Prudential has also tackled the issue of how to deal with the category of repeat transactional clients, the group that is likely to become more and more prominent as the shape of the market changes.

“We have devised a charging flexibility to deal specifically with those transactional customers,” he says. “For example, in our pensions contracts, we will provide an ad hoc charging functionality. This means that, irrespective of whether the policy is being changed, at any point the adviser can come to us with an instruction from the client and ask us to deduct a sum of money from the pension pot to pay for a piece of advice. The reason we have done that is, from a taxation point of view, it is by far the most efficient way for customers to pay for that advice.”

Overall, Prudential is dedicated to working with advisers and their customers to make sure they are ready for the changes that will come about as a result of the RDR. It is keen too to examine the trends that are likely to occur, anticipating the ways in which the market may change in the future.

In that way, it can ensure it remains ahead and in a great place to continue to support the adviser community.

Visit our RDR centre for support and information on Prudential’s post R Day propositions http://www.pruadviser.co.uk/content/support/rdr/