The extent to which the regulator relaxes the current rules surrounding a personal recommendation could have a wide reaching impact on how advice is provided in the future, and the business models of the advisory firms that provide it.
The pricing transparency for individual investors introduced by the RDR, was strengthened in April 2013 with the issuance of Policy Statement 13/1 entitled, Payments to platform service providers and cash rebates from providers to consumers.
This policy statement had major implications not just for the platforms but also advisers as it called time on the payment of rebates and trail income. For the execution-only platforms it was a bit of a game changer and prompted the regulator to take a closer look at how investors are guided by tools on these platforms in their investment decisions.
So what exactly is guidance?
Guidance is an industry term, and it is not recognised by the regulator. Advice is either given or it is not. Advice can, however, be simplified and we saw a guidance paper issued on this subject in March 2012. Simplified advice is defined by the regulator as streamlined advice processes, aimed to address straightforward needs, the outcome of which may be a specific product recommendation.
But advice, with the protection and reassurance it offers, is expensive to deliver. Investors are flocking to the perceived cheaper option of the execution-only platforms. Here the investors find tools and widgets to help them make investment decisions. So execution-only is not strictly execution-only and the hint of advice, in the form of guidance, has crept in.
We know the regulator is keen to address the sizeable advice gap that exists in the market, especially considering the impact that the RDR has had on sales of savings products. With the likely trend of continued pricing sensitivity from investors, the execution-only platforms have a major role to play but the playing field needs to be level.
Advice in whatever guise, needs to be evenly and fairly regulated, to everyone’s benefit. The cost of investing and basic advice will face further downward pressure as transparency in the market continues and direct to consumer (D2C) offerings become more competitive. The cost of advice will be even more explicit in the superclean world in which products and platform charges are priced at an equivalent level across the market, whether delivered with advice or not.
Advisers need to be prepared for the future where more people do more things online. Now is the time for business models to be adapted and positioned for the future. While there will always be demand for face-to-face advice by high net worth individuals, and complex cases, if the statistics provided by Cass Business School prove correct, there are not enough of them to go round and their numbers will dwindle.
Advice cannot be provided solely online, it succeeds through trust and one cannot replicate this online. In the same vein, execution-only is also not the answer, investors usually want support, through a human being particularly at the start of a professional relationship. Advice is vital, its delivery just needs to be become as efficient as possible.
For a large number of savers and investors, advice is already too expensive. But advisers with modern technology that complements and optimises their proposition can offer a half-way house. These advisers can expect to grow and protect their businesses as a result.
By expanding their business models to include a wider segment of customers and increasing their use of technology to deliver advice, such as in simplified form, advisers can capture clients, re-engage with existing ones that are no longer profitable, as well as service their clients’ extended family members. By being able to develop these relationships in this way, they can build a highly successful referral pipeline for their business.
With a ‘light touch’ web-based service, advisers give clients the ability to service most of their own needs without relying on and paying for full advice. The adviser would be there in the background and available when needed to help with more complicated decisions.
Clients get just as much advice as they need at each stage. The adviser can focus on building funds under management and capturing an ongoing adviser charge for the provision of this service.
Nicola Robinson is manager, corporate department at Parmenion
WHAT WILL THE SUMMER HOLD?
Nicola Robinson looks at what to expect from the FCA’s thematic review:
“The regulator will either choose to recognise and attempt to regulate investment ‘guidance’ or simply choose to firm up and provide more clarity around earlier guidance on simplified advice. It will be interesting to see if there is an impact on risk-profiling tools which are currently unregulated but which execution-only platforms use to guide investment decisions in a way that is very close to the scope of simplified advice.
“Either way, the investment services offered on platforms will become far more important. Platforms can support advisers with more technological solutions to bring down the costs of dealing with a larger number of clients which must be the way ahead for businesses that want to lead a generation. Client-facing, interactive technology, but controlled by advisers, is the future.”
THE FUTURE OF THE D2C PLATFORM MARKET
WHAT’S IN STORE POST-RDR
In its recent white paper, Bringing in the Harvest: the future of D2C platforms, Altus notes that post-RDR the power is shifting to the consumer, as can be seen in the platform space. Here they highlight some key points on the future of the D2C platform space:
• The consumer experience is the new ‘product’.
• Social media is engaging and powerful but can be damaging if not managed carefully.
• Value is critical, especially where assets and tax benefits are identical.
• Charging transparency highlights what consumers are really prepared to pay for ‘service’.
• Brand is king – successful brands with consumer loyalty can sell anything.
