An analogy that I’ve being using a lot recently in relation to regulatory change is that of a sticking plaster.
Not, as you might imagine, to suggest the changes we have seen are merely a sticking plaster on an enormous wound – I actually think they are positive.
But there is still one obstacle to overcome, which is why I’d compare regulatory change to the notion of having a large sticking plaster on your arm.
You know the removal of this plaster is going to hurt, but how you approach its removal will determine the level of pain you face. You must decide whether to do it all at once or take your time. And, of course, the longer you take, the more disruption it may cause.
Looking at the platform market, and how it has embraced regulatory change, is very interesting. Different approaches have been taken. Some, for example, have been 2016-compliant for almost two years, taking the alleged pain early.
But I’m interested in the wider impact of the changes brought about by the ‘sunset’ clause and pension freedoms. The immediate impact appears to be on advisers and platforms. However, a third party – discretionary fund managers (DFMs) – is also affected, and I’m not convinced they are totally ready.
As advisers grapple with the challenge of how they manage the widening scope of advice required, particularly for clients approaching or in the retirement phase of life, many are looking to outsource their central investment propositions. Their natural home is a DFM.
On the face of it, these extra assets are very welcome for the latter businesses. But the impact of managing these additional assets is beginning to dawn on them, and existing business models need to be challenged and, in many cases, changed.
The recent pain of suitability scrutiny is still raw for many, and these DFMs are keen to ensure a model is in place which keeps that responsibility as far away from them as possible. Similarly, many existing models just aren’t scalable, meaning a reassessment of the level at which a customer receives the full “discretionary” service must be undertaken.
And then, of course, there is the issue of whether current thinking on risk-aligned model portfolios in the accumulation phase can be replicated for the decumulation or income stage (hint: it can’t). This has resulted in some serious soul-searching for DFMs, but it’s a soul worth searching.
Those that get it right will put themselves in a strong position, both in terms of their appeal to the adviser market and to their own internal finance departments, who will be delighted at the potential for multiple new assets being run in a scalable and profitable manner.
The winners will not only have robust and repeatable models suitable for different life phases, income requirements and tax needs, but will also continue to innovate as regulation and technology evolve. Sitting still is not an option in 2016. Neither are sticking-plaster solutions.
Graham Dow is head of wealth management propositions at Standard Life Investments
