They say that when you are up to your waist in alligators, it is tough to keep in mind that your objective was to drain the swamp
At the moment, many financial advisers could be forgiven for feeling they are the ones trying to drain the swamp while the sole focus of the government and the FCA is to keep breeding more alligators to make their business life ever more difficult.
Such a reaction to the many challenges advisers have had to face in recent years is perfectly understandable; however, I believe the reality is that as a financial adviser you are now in the best possible position to benefit from this catalogue of change.
Indeed, a couple of years ago I forecast that financial advice was entering a new golden age. I made this forecast before the government announced the most important and dramatic raft of changes to pensions’ legislation which I have seen in the whole of my 40-plus years in financial services, strongly reinforcing my view.
So in this article I aim to set out for you why, despite the traumas of the retail distribution review, fees, sunset clauses, pension reforms and the guidance guarantee, I believe so strongly that we are entering this golden age. If there was any doubt about it, this view is now being reinforced even further by the recent announcements by a number of life companies that they are entering or re-entering the advice market.
In order to appreciate the scale of the opportunity, we need to look at some of the key events and threats of the last few years and see what positives, if any, emerge. This is a vitally important first step, because in developing any strategy for the future you have to face up to the realities of the present situation. Remaining positive in the face of any difficulty is an essential part of meeting challenges (although there is certainly no call for rose-tinted spectacles).
Let us start by touching briefly on the RDR. We have to face the fact that a number of long-standing advisers, who for years had delivered a valuable service to their clients, were forced out of business by the RDR. This was bad not only for their clients but also for consumers in general, and it made the UK’s savings and protection gaps even harder to resolve. Against this, however, as we enter the third post-RDR year, the public are now being served by increasingly professional and better-qualified financial advisers.
The next point we have to consider which is also related to the RDR, is the changing face of advisers’ remuneration. One could argue strongly that banning commission has seriously disadvantaged consumers in two ways: firstly, their ability to choose how they pay for their advice has been taken away from them. Secondly, the extensive cross-subsidies from the more wealthy clients which enabled many advisers to spend time serving less well-off clients, are now extremely difficult, if not impossible, to obtain, due to the FCA’s ‘fees only’ regime. Therefore, as forecast during the RDR consultation process, less wealthy consumers have been disadvantaged as a direct result of government/FCA policy.
Nonetheless, the demand from consumers for personal financial advice from a trusted adviser continues to increase.
This brings us to the next issue: the ‘sunset clause’, which takes effect from 2016. I do not believe the implications of this are yet fully appreciated by a great many advisers. For years, advice firms were encouraged to develop a strong recurring income from clients’ investments by putting them onto a platform intended to increase the security and robustness of their businesses.
In essence, this was the new business model for advisers. However, on 6 April 2016, all a firm’s accumulated platform income could potentially disappear under the sunset clause. In reality, I believe this is a real business opportunity because you, the adviser, rather than the platform, are now in control of how much remuneration you earn from your clients.
Indeed, it puts you at the heart of the client’s affairs, which is exactly where you should be, as it is your knowledge and your client relationships which create value. To put it bluntly, it is you as the adviser who has always developed the client relationship.
We now turn to the dramatic pension reforms which have been announced, and which are now only six weeks away. I do not intend to examine the reforms themselves in detail here, or to spell out the inherent dangers which the new pension freedoms create for both clients and advisers. But what I can say with absolute certainty is that we are going to see another pension scandal emerge within the next five years. I therefore strongly advise you when providing advice to clients on pensions and especially the decumulation of their pension funds, to ensure that every aspect is properly documented, and that the client acknowledges in writing their understanding of the implications of the actions being taken. Good advice begins and ends with good compliance, and this has never been more true than in relation to the new pension freedoms.
Having outlined the health warning, I believe that the fact that savers can have access to their pension pots from age 55 will dramatically increase the amount people will be prepared to save for their future. This will result in much greater funds being accumulated in the coming years. My personal view is that the size of pension pots in 10 years’ time is likely to be double current levels. For advisers, this means even greater demand for advice as these larger pension funds create greater responsibility and remuneration for the adviser.
In my view, whatever the government’s guidance guarantee does in helping people understand their choices, it is inevitable that they are going to want, indeed demand, help and advice. Given that there is an acute shortage of financial advisers, brought about in large part by the FCA and an inevitable increase in demand, not only is it clear that we are entering a golden age for financial advice but also it should be no surprise to anyone that some product providers are looking to jump on the bandwagon.
The latest example is Standard Life buying Pearson Jones from the Skipton Building Society, coupled with its announcement that it intends to build a restricted national offering. Post-RDR, insurers have lost their control over distribution, and this is another clear indication of how they are seeking to regain that control.
I do not believe we are about to return to the heady days of the 1970s and 1980s, with the insurance companies’ giant sales forces dominating distribution. However, given the enormous opportunities ahead of us, we should not be surprised that providers are also seeking to profit from the increasing demand for advice.
I am equally confident that it is not a development we should fear.
Ken Davy is chairman of SimplyBiz
Key points
The financial advice industry is entering a ‘golden age’.
Banning commission has seriously disadvantaged consumers.
Some product providers are looking to jump on the bandwagon.
