Advisers warned not to get hung-up on RDR outcome (Published on IFAOnline 23-04-08)
The outcome of the Retail Distribution Review (RDR) should not matter as advisers must change their business models to succeed anyway, according to transition planner FP Advance.
Brett Davidson, chief executive of FP Advance, says IFAs will have to shift from a solely commission-based model to include fees to create sale value.
Speaking today at a Scottish Widows RDR roadshow, he says charging fees for advice would help advisers plan their business better as they could predict their monthly income and build a renewable income stream someone will want to buy into in the future. He calls the financial advice sector a “great way to get rich slow”.
He says: “Advisers have been brainwashed by history. Advisers have been told ‘you’ve only got value when you’re selling something for someone else’.”
He also recommends downsizing client numbers to concentrate on a select client list, having previously reduced the client base at the Australian business where he worked as a partner, Profile Financial Services, from 3,000 to 250.
This led to the average revenue per client rising from less than A$100 (£48) to more than A$4,000 a year. Meanwhile, the recurring fee-based income rose from A$250,000 to more than $1m a year.
Davidson also said advisers must provide ongoing advice and recognise advice does not just mean reorganisation such as pension pot consolidation.
He adds IFAs must ensure their clients understand the value advice adds to financial planning and not let them believe they only pay for form-filling.
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“I agree completely with Brett Davidson. I have worked hard to create a successful fees-based practice over the last 13 years. I have reduced my client base to approximately 60 clients and this has allowed me to create a good work/life balance. I earn about £50,000 per annum, work from a small office at home four days a week, do charity and campaign work and I'm on call for the local Coastguard cliff rescue team. I see my wife and children every day. I don't commute. I have clients all over the UK and the world. What a great life!
If I was still working to the old sales model I wouldn't be in this position and I'd be fretting about the credit crunch, the mortgage market and everything else! My clients are well-off older people who have largely made their money and I am tasked with the job of managing their hard earned cash. But it isn't luck. I had to work very hard to make the transition and I did it ages ago in 1995. It's definitely a "get rich slow" situation though, Brett's right on that.
Now everyone is being pushed down this route and many of the big companies whose directors until very recently used to scoff at the fees approach are now joining us. But clients need to be very careful because, as Brett says, there needs to be culture shift away from sales to advice based practice, and I am not at all sure that the majority of non-IFA advisers (banks and insurance company advisers that is) are in any position to do this yet.
In fact I would go further. I think the banks and life insurance companies see fees as simply another income stream in addition to commission. They do not care much about service or treating customers fairly except where they see it will have a significant impact on the bottom line. I and every other IFA in the country will tell you tale upon tale of poor service standards that would never be tolerated in the fees based world.
Culture changes don't happen over night but banks and life companies need to raise their game in respect of TCF and see that in the long run they too can benefit along with their clients. It just means sacrificing a bit in the early stages. What is encouraging is the FSA attitude to small IFA firms. They seem to be supportive of my business model because TCF is embedded in that model as a commercial necessity. For the big companies it's still a numbers game and that means that TCF is a problem for them whereas it's an advantage for us and chance to show off our credentials.
Finally, when I started on this journey, many of my peers accused me (in the nicest possible way) of cherry picking, and I couldn't agree more - it's a commercial decision that has to be faced. They said ordinary average earning and lower paid people could never afford to pay fees. Commission would always be preferable for them. Well I surprised myself. I am right now, dealing with increasing numbers of ordinary and less well off clients. I charge by the hour like an accountant or solicitor and although the work I do for these people is of a one off nature, they are happy to pay me for my time. In the same way that they would use a solicitor to write a will or advise on property conveyancing, they come to me for advise on retirement.
Whilst I must admit that I don't see many younger employed people, I suspect that this is because I don't advertise and my referrals tend to come on a like for like basis with older clients recommending their friends for similar services. Whilst I suspect that these smaller clients won't ever be my bread and butter, it shows that for advisers with the right skill set and who want that sort of client profile, charging fees need not be a barrier.” Chris Welsford, IFA
This article was first published by IFAonline, part of the Incisive Media group.
