What about orphan clients?

John Lappin

re we reaching the second stage of the retail regulation revolution? We have had the big rule changes – or very nearly. Now perhaps we are witnessing the consequences for financial services businesses.

Some of these are rather good.

For example, it seems safe to say that a reasonably large number of investment advice businesses have adapted to the new world and look as if they are positioned to prosper. That is excellent news for the clients of those businesses too.

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The consequence the FCA is probably happiest about is the falling fund prices, especially for active fund management across the various platforms. It looks and feels like a price war, but what we don’t understand just yet is how far this will reverberate in the advised section of the market. Fund managers may believe they can actually defend margins in the business they do with advisers, though it may be more difficult to hold the line than they think.

Separately, it appears that the network model is being stressed by a combination of the RDR’s commission ban and the inducements ban. This is not really about grand days out, hospitality and fine dining, but much more about the ending of long-term, multi-year ‘marketing’ support of networks by providers.

I suspect this is the Achilles’ heel of the advised market, given that other directly authorised advisers have achieved a measure of business stability and even the scope for growth.

The ructions stemming from Honister’s demise show that many adviser business fortunes are bound up with the fate of their networks. The challenge is for networks to reinvent their model yet again.

It is notable that the new boss at Sesame, John Cowan, sounds sure that others will be following the Sesame move to restrict – and I wouldn’t bet against it. If the financials, the compliance and the consumer offering can be got right then this sector will remain an important part of the landscape.

Accepting that networks prove to be resilient, it suggests a pretty clear breakdown within the market – an advised independent and directly authorised segment, a restricted, networked, more controlled segment and a strongly price focused execution only segment.

I wouldn’t be sure that the government and regulator will ride to the rescue of mass-market bank advice and this looks less likely after the big Lloyds Banking Group fine last year.

Therefore the final part of the landscape may be workplace pensions, which will be a growing influence and vital source of asset accumulation.

If this is the emerging post-RDR landscape, it will be interesting to see where consumers fit into this. There will be those who are happy with their adviser – that adviser may be independent or restricted. There will be established and recently converted do-it-yourselfers. There will be those who, so far, are only reached through their employer pension scheme. But I still think there may be many hundreds of thousands and maybe a few million of those we must call orphans. They must provide a big challenge and an opportunity. A business that reaches them could do very well.