Penalty Kick
Four years have passed since the FSA launched its Retail Distribution Review (RDR) in June 2006.
To put this into chronological context of the World Cup football fever that had, up until this week, gripped the nation – in June 2006, England was eliminated from the 2006 competition after a 3-1 penalty shoot-out defeat to Portugal… a distant memory for most.
For the platform industry, a lot has also changed at least from an adviser perception point of view since the FSA kicked its own penalty in the direction of the financial planning sector back in the summer of 2006.
Most of the change has been for the better with increasing numbers of financial planners awakening to the merits of using these investment administration vehicles and the providers themselves improving the functionality and offering within them over this period.
The analysis and insight we have been producing at CoreData Research over this period reveals a maturation of the perceptions of financial advisers towards platforms and wraps.
Meanwhile competition in the sector has grown, partly through the entry of new smaller nimble providers, although the major groups of Skandia, Fidelity, cofounds and Transact still dominate in terms of business flows and activity.
Back in 2006 there was a great deal of misconception as to what platforms were and how they could or could not enhance the operating efficiency of financial planning practices.
Some advisers felt that platforms (those who weren’t already using them) would lead to restrictions on their product placement practices while others felt platforms only offered access to the manufactured products of the sponsor behind the administrative tool.
Today however, more advisers are using platforms as fundamental components in the day to day management of their businesses, while an increasing number are engaging with some of the higher functionality wrap offers in the market.
With the onset of full RDR in two and a half years time, the dependence advisers have on platforms (some might say the relationship is symbiotic or a mutual dependence) is only going to increase.
RDR will set a new benchmark for the advice industry, and with the removal of many previous remuneration practices (or at the very least their disclosure) that were standard across the industry, the need for truly efficient businesses and systems that support those businesses is critical.
There are clearly challenges on the horizon with the FSA’s response to its discussion paper on platforms to be eagerly awaited by the industry, with a sense any ruling will be in the current spirit of RDR – the removal of payment or incentive structures that it deems could impair the true independence of any advice given.
The industry has lobbied the FSA to be pragmatic in its view and treatment of the administrators of platforms.
A ruling too heavy handed will only lead to sub-standard technological development and service delivery in future.
At a time when increasing planning practice efficiency is fundamental to the continued healthy development of the financial planning industry, draconian measures that put undue downward pressure on the platform industry could damage the long term health of the sector as a whole.
RDR, some argue, will lead to advice becoming inaccessible to millions of UK consumers (some go so far as saying it will only be affordable to already affluent consumers) as the market evolves into a fee-based service industry.
Many consumers either cannot afford to pay for financial advice or prefer for the cost of delivering the advice to be borne by the product manufacturer – an old argument perhaps, but still a pertinent one nonetheless.
Therefore any new limited-advice or low-cost advice business models post-RDR will depend on the ability of the service providers behind the scenes to deliver state of the art cost-effective administration.
This cannot be achieved if the FSA is too heavy handed.
We feel, in respect to the platform industry, that a more acceptable middle ground will be if the FSA shows an inclination to focus more on transparency – or unbundling – as it is commonly termed by the industry.
This could potentially over the longer term actually drive a ‘push’ from consumers (direct investors) to seek advice.
Our research of the direct investor market has revealed that while a proportion of this segment is loath to ever engage with or use a financial adviser – partly due to an investor’s own controlling behaviours and partly due to a lack of trust of third parties (in this case advisers) – a notable proportion could be enticed into the adviser market if the price was right.
At present many direct investors feel they can get a better deal by doing it themselves, however CoreData analysis reveals that many direct investors could in fact be better off from a cost point of view by investing via an intermediary and through a platform.
If unbundling becomes a reality, we feel over time that healthy numbers of non-advised investors could be inclined to seek out an adviser.
Whether the relationship these types of investors will be looking for in the first instance will be transactional or full service is difficult to predict, but over the longer term it is likely to depend on the expertise of each adviser they engage with and the skills of the adviser to add-value to the relationship.
