Guest writers

New rules for professionalism

The FSA’s first Policy Statement of 2011 marks the end of a lengthy consultation on the professionalism strand of the RDR. The new rules confirm the process for becoming an FSA accredited body, initial and ongoing knowledge requirements, details of the data FSA will hold and how the new standards will be supervised. We at last have the full picture so know what must be done and by when.

FSA has re-confirmed the deadline of the end of 2012 in which to complete an appropriate level 4 qualification including any gap-fill CPD. All advisers who provide investment advice must meet the same standards. Some respondents to the consultation had argued that the scope of the final exam standards was too broad or not relevant but the FSA has stuck to its guns, stating that advisers need knowledge outside their preferred areas of practice in order to understand whether recommendations are suitable for clients. In my view, it goes further. The new qualifications should be based on broad standards in order to meet the needs of new entrants who could operate in any type of business. Second, whilst an adviser might currently only advise in a specialised area or be able to recommend a limited number of products, they still hold the regulatory permission to advise wider. So whilst we have one permission for all and the qualification is portable, there should be no scaling down.

I must confess that I was pleased that the FSA has taken a sensible approach to the qualification gap-fill requirements. The gap-fill tool developed last year by the CII has proved extremely popular and the publication of a new gap-fill template in late December caused quite a stir. FSA has confirmed that advisers will be able to identify and fill their gaps using either the template published earlier or the revised one so that those who had started to fill gaps would not be disadvantaged. With over 80 gap-fill sessions already planned for 2011, the PFS team was very relieved to learn our support programme can proceed as planned.
 

Key areas
Two key areas going forward are the introduction of FSA Accredited Bodies (ABs) and a tougher approach to CPD. From 1st January 2013 all investment advisers must hold a Statement of Professional Standing (SPS) issued by an AB. The purpose is to provide independent verification that the adviser is appropriately qualified and maintains adequate CPD. FSA has set a minimum requirement of 35 hours of CPD, 21 of which must be structured. Personally, I am not a fan of measuring CPD in hours and would have preferred to see this set as guidance, not a rule. Rules tend to create a compliance regime but CPD should be driven by a desire to be the best at what you do and to improve service to clients.

Whilst firms ultimately retain responsibility for an adviser’s training and competence, verification of CPD activity must be undertaken by an AB. As you would expect, the CII is applying to become an AB and PFS adviser members will be issued with the requisite SPS as a member benefit. We already provide and audit CPD, have a code of ethics and disciplinary process, so for us and our members meeting the new standards will be business as usual.

Importance of using technology

IT is hard to understate the commercial consequences of RDR. In practice the new regime represents the largest ever change to operating practices in the advice market. This actually dwarfs even the introduction of regulation in 1987 as it fundamentally redesigns the financial model behind adviser firms.
 

Major challenge with administration
One of the major challenges for advice firms is the extensive amount of administrative work that must be undertaken preparing for, and arising from, client meetings. Working on paper and over the phone this will inevitably mean many hours of work. Historically the cost of such activity has been substantially defrayed by commission. The labour intensive costs of dealing with a range of providers have effectively been hidden from the client; in the new environment adviser firms will inevitably find it considerably harder to absorb such costs.

Charging clients
Whilst firms will doubtless offer clients a diverse range of approaches to charging including hourly rates, a percentage of assets under advice, menu pricing or fixed fees to name but a few, it is hard to see how per client income can be maintained at anything like the levels historically delivered by commission. Some firms will have migrated their commercial model over many years and be protected from such declines, however for every one adviser in this fortunate position there will be several more that are not. This makes action to cut business costs imperative. A good example of this is the so called “Contract Enquiry” message service which delivers advisers real time valuations of their clients investments. Currently Scottish Widows is delivering in the region of 60,000 valuation messages per month to advisers using this service.  This significant level of messaging demonstrates that large numbers of advisers are clearly achieving real savings using the service although clearly there is scope for even more firms to benefit.

Using technology to become more cost effective
Firms need to look closely at all the repetitive tasks carried out in their business and ask can these be automated. Indeed the question may be can I afford not to automate them. As income falls, there can be few firms who will expect to be able to earn as much under adviser charging as they would previously on a commission basis; many advisers economic survival will rely upon their ability to reduce costs within their businesses.

As many as one third of all adviser firms do not operate a dedicated client management system and in my experience there are probably as many again who use only a very limited benefit from the systems they do use. For any firm that wants to survive in a post RDR world making full use of such technology should be a must. In choosing such systems it is important for advisers to identify the system that will best fit their business needs. Although there are many such systems in the market, in my experience none of them will be perfect for every adviser. With this in mind F&TRC recently published our benchmarks of a range of the leading software suppliers, these can be found at www.ftrc.co.uk

In a post RDR world the extent to which a product provider is able to support electronic and automated processes will, I believe, become one of the key factors influencing who to place business with. In practice those firms who cannot help advisers take full advantage of technology will in effect be making themselves more expensive for consumers to invest with as the adviser will need to pass on the cost of continuing to operate using antediluvian means. Success in the new world is going to necessitate working smarter and maximising the adoption of technology must be crucial to that process.

The FSA has published the final consultation paper for the Retail Distribution Review (CP 09/18 Distribution of retail investments: Delivering the RDR) so there will no longer need to be any more guessing about the main areas that form this agenda for change. If you are change-resistant, stop reading here! For those unfamiliar with what defines "change resistance" a good clue is to listen to people who state "The way we have always done it is" or "It can’t be done like that . . ." and then you will know who they are.

There are a number of actions that the owners of IFA businesses need to take and they need to take them soon and I have described an agenda for RDR change below.

People
Have you got the right people in your team? I have no doubt that the successful post- RDR IFA will be team rather than individual based. If you have an environment where the Adviser pretty much takes responsibility for advice then in my view you will not be post-RDR successful. If the adviser acquires the client, carries out the know your customer process, researches and formulates advice and then completes application forms for implementation of financial products and then comes back to the business centre to justify the advice, then your business model is broken! (or at least breaking)

Either you are going to have to retrain your staff and develop them into team players or you are going to have to recruit new more forward thinking staff. A huge challenge either way so my advice is "Get on with it!" Recruiting the right people will be the single biggest challenge faced by the IFA business owner.

As well as the relevant experience, knowledge and skills these people are going to have to be team players. Team players demonstrate certain key attributes, they are highly teachable, they are service orientated, they are emotionally secure (they have their ego under control) and they are creative recognising that service can always get better.

Systems and Processes
A further key factor for business success in the post RDR world will be to have robust systems (the big picture of how you do what you do) and processes (the step by step route through the system). Systems and Processes drive efficiency into the business and help drive up effectiveness. They also enable bespoke outcomes to be delivered based on consistency of effort. The successful firm will have everyone in the team doing things the same way and this will also have the beneficial effect of reducing business risk.

One way of doing this is to have a combination of Standard Operating Procedures simple direct statements of how things are done, backed up with checklists

Post RDR, firms will have these documented systems and processes and driven by checklists so that the team all know what "good" looks like.

Brand
Despite common belief that brand is about a logo or image, brand is, in fact, about everything that a firm does and indeed, everything it does not do. The successful post RDR IFA firm will be building a brand and that brand will be at best damaged and at worst broken if it revolves around "choosing the best product from the whole of market" Worst still will be pretending that the IFA can choose "the best investment fund"

Anyone who can use the internet can do that. Successful IFAs will have a powerful client proposition based around long-term delivery of financial planning and review services.

The culture of the IFA firm will be really client centric. It will recognise that solving client problems is what financial planning is all about and it will build its services around problem solving and the long-term relationships that consumers seek. Selling financial products will be just a small part of this problem solving approach.

Assets under management
This will help to determine the repeat revenue payable to the business. It will have a major impact on the value of the business where that value is expressed as a multiple of repeat revenue. So the accumulation of assets is a key factor for success. However, it is not good enough to simply "churn" every client and force them say onto a chosen "wrap" platform. Such a move must be justified and match the best advice requirements of the regulator. And who betide the IFA in the post RDR world who does not spot the elephant in the room. Wrap will eventually become a client tool.

Act now
Most firms who have already re-engineered their business will tell you that this process takes a long time. If the firm has a "carry on as before mentality" it will struggle to prepare itself for the massive change that is up-coming, I suspect it will not survive.

Only 6 months ago we were awaiting the arrival of the RDR Feedback Statement. We are now less than a month away from the highly anticipated June Consultation Paper (CP). Given the Financial Services Authority's (FSA) internal approval processes, we can be assured that the final draft will now have been completed.

Impacts of the recession
A significant amount of water has passed under the UK Financial Services bridge since last November. The stock market has started to come out of its steep decline but we've now got the lowest interest rates for decades, steeply rising unemployment, and a further depressed housing market. We've had a budget that has hit the wealthy hard and questioned the viability of pension products for those earning over £150k and on top of this we are now seeing the middle term impact of the recession. Life Assurers have announced much lower revenues and reduced dividends and IFA merger and acquisition activity is significantly rising as a number of firms’ profits dive or banking arrangements are withdrawn post the Banking crisis. The FSA has also been stretched with a number of providers and distributors receiving tough ultimatums for various misdemeanours and now the focus in turning on to the Building Society segment as they seek to respond swiftly to the lower ratings a number have received earlier in May.

We have to expect the June CP to have been impacted by all these market changes. In my view the FSA is more likely to harden its stance towards the implementation of the RDR principles outlined in 2008 but their credibility, which is already under intense scrutiny, is clearly on the line.

The end of the commission model?
The biggest challenge for the FSA is ensuring they respond effectively to the famous Gleneagles speech and demonstrate their proposals will improve both the quality and quantity of financial advice available to consumers. I have no doubt that "Quality" will be addressed successfully. QCA Level 4 will become the qualification benchmark, grandfathering will not be permitted and the introduction of a new Professional Services Body is almost certain. The FSA will not ban indemnity commission, but the current economics facing Life companies along with the rule that independent financial advisers will need to move to a fee based remuneration model, will quickly confine the commission model to history.

The FSA are faced with at least 3 big challenges in their June CP

• What proposals will they put in place to help advisor firms transition to fee based models and how can advisor charging (CAR or FGP) work in practice when, these days, most investment propositions are multi fund based? The cost impact to the industry of shifting to an advisor charging model has been grossly underestimated. We also need to understand whether the RDR proposals will move to protection based products and if so when. Maybe the CP will just stick with fees as the only remuneration mechanism?
• There is no question that in the short term the current economic client, added to likely increased capital adequacy levels (CP08) and the RDR professional standard proposals, will result in a significant amount of current advisers leaving the industry. Out of a population of over 30,000, many industry commentators are expecting at least a third to leave by 2012. Significantly raising the "Quantity" of advisers in a market where the vast majority of the market are under pensioned, under protected and have far too little savings is absolutely essential. The FSA, along with the Government, need to be much more innovative with the guided sales model or introduce far better incentives for graduates to move into the Financial Advice Profession, if they genuinely want to improve access to advice.
• Finally, the CP needs to tackle the outstanding issues surrounding WRAP's and Platforms. Clarity is needed around the rules underpinning these new technologies which undoubtedly are the only true opportunity to lower the cost of advice, improve regulatory compliance and most importantly, provide a significantly improved advisor and consumer service proposition.

It feels like only yesterday that it was November. The Financial Services Authority (FSA) had published the RDR Feedback Statement (FS), and the proposed June Consultation Paper (CP) felt an eternity away. But how quickly these things develop. We are now in March, with barely three months to go, and work behind the scenes has been frantic.

Because the FS was notably ‘high level’ in many areas, FSA, in conjunction with industry, consumer groups and other stakeholders has been pushing ahead with much of the more-detailed thinking required for the June CP. The industry - AIFA, ABI, BBA et al - have also been considering the forthcoming CP, investing heavily in research and considering the challenges that lie ahead.

And there are many challenges, some of them well versed and others less so. But because of the high-level concepts broadly covered in the FS, it is only now that the profession is having to come to terms with the detail.

Take adviser charging for example. As a broad concept it is not one that could be disagreed with – indeed conceptually AIFA is in favour of returning the control of remuneration to intermediaries. But how could it actually work in progress? Insurers could adapt systems, of course. But what are the costs of this? Is now the time to force companies to invest significant amounts of ‘precious’ capital into a ‘nice-to-do’ project?

What if we look further afield?
Take the investment management sector. RDR actively encompasses wrap/platform models. But how does adviser charging work in this sector? What is the cost per fund of moving to a totally flexible remuneration model, and when multiplied by the sheer number of funds does this really stack up as an industry initiative?

We could also consider the issue of qualifications. Again, a broad concept that couldn’t be argued with is an increase in the benchmark for new entrants. Designing a syllabus and considering areas of core-competency is not necessarily that difficult – certainly within the IFA arena. But what about existing advisers? How do they transition? FSA has started to help in this area, confirming that those with full legacy qualifications at a level above the benchmark, but not formally credited with QCA Level 4 (due to their legacy status), would be able to bridge any gaps through CPD. So those with AFPC for instance can, rightly, rest-assured that CPD should be sufficient.

But what about the much commented upon ‘on the job assessment’ route? This is critical to the success, or failure of RDR. Loosing experienced advisers who choose to retire early would be a triple-blow for the profession. Firstly, it would create an advice vacuum, with the loss of access to advice by consumers who rely, happily, on these advisers. Secondly, it would represent brain-drain. What other sector would allow its most experienced practitioners to depart on mass? And thirdly – and often overlooked – is the role these advisers take in the mentoring of new talent entering the profession. New advisers can take exams, read books and can hone their soft-skills on-the-job, but they need the advice and guidance of experienced mentors.

Needless to say, AIFA is still working flat-out behind the scenes. Answers to all these issues, and many more, will only come from the wider industry working together to develop solutions. Let’s just hope we have some pragmatic, concrete, sensible proposals in June.

Despite the clamour from the broader market place, the FSA remains committed to delivering the desired outcomes of the Retail Distribution Review within the given timeframes. The IFP certainly supports this approach although inevitably there might be some pragmatism needed to allow for actual delivery. The policy and requirements should certainly be in place and there is little excuse for advisers and their teams working towards certain objectives between now and 2013. There are 3 key areas to focus on.

Qualifications
Qualifications represent a big investment in time and money. We are reliant upon the Financial Services Skills Council providing a solution that will rest at QCA level 4. This new standard will embrace knowledge and application and will hopefully represent a great step forward. It might however take until 2010 to be in place. Advisers with the blessing of the FSA (no regrets policy) should still pursue existing level 4 qualifications like the CII’s diploma in Financial Planning or other similar qualifications offered by the IFS and SII. The worst thing that can happen is that gap filling will have to be picked up in future CPD programmes. The Certified Financial Planner programme sits at QCA level 6 and of course tests knowledge and application. This will put advisers well ahead of the curve. If not already doing so all advisers should fully document their CPD so that there is sufficient evidence to back up any future cases. All advisers will have to formally submit CPD records and evidence their ethical behaviour in the future whether a member of a professional body or not. Tip might be to look for a professional body that can not only support you and your business but is going to add value to you as well.

Captial adequacy requirements
The IFP is concerned about proposed changes to capital adequacy requirements and has submitted a response to CP08, the FSA’s consultation paper on the subject. Firms cannot complain particularly about holding £20k instead of £10k nor the need to hold 3 months' operating expenses on reserve. Financial Planners would ordinarily recommend their clients do just that. The IFP is worried however about unintended consequences of the proposals. Those businesses that have moved to fees, invested in technology and paraplanners etc will naturally have a higher overheads than the more traditional sales model with self employed advisers. These businesses would therefore be penalised by comparison which seems out of kilter with the intention of the RDR proposals.

Fee-based business
The biggest issue that most firms face within the timeframe is the transition to a fee based business without the reliance on indemnity commission. This is a huge step change for firms and many IFP members report taking 3 years or more to transition their businesses. The end result is definitely worth it and the IFP and its membership can offer a huge amount of support to advisers undergoing similar transition.

There are undoubtedly challenges facing us all, but in the end the gain will definitely be worth the pain.