You may already be aware that the current system of financial advice in the UK is about to come to an abrupt end. After midnight on 31st December Financial Advisers, including IFAs, will need to have obtained a much higher level of qualification. The changes are part of the Financial Services Authority (FSA) Retails Distribution Review (RDR). At the moment it is possible to operate as a financial adviser, financial planner or wealth manager with a only Level 3 qualification. Without delving into the murky world of exam standards, this equates to roughly a 5th or 6th year secondary school exam. Clearly that is not a suitable level for anyone wanting to call themselves a professional and advise clients on their financial future. The good news is that the majority of existing advisers are expected to achieve the new Level 4 Diploma qualification by the end of the year.
At Forty Two we have always taken the view that the minimum exam standards were too low. Since the mid 1990’s I have voluntarily obtained Level 6 qualifications (both CERTIFIED FINANCIAL PLANNER professional and Chartered Financial Planner) so the new rules won’t impact us or our clients.
There is more to the new post-RDR world of financial planning than just exam qualifications though. Unfortunately, many advisers have been so focused on reaching the new minimum qualification level on time that they have spent insufficient time on the even more important aspect of the new world.
From 1st January next year the FSA will ban commission on the sale of financial products. Advisers will require to agree a fee for advice with their clients totally free from any influence from product providers. It is probably no coincidence that almost every mis-selling scandal can be traced back to commission abuses. According to an article in FT Adviser today, “Investment bonds sold by life insurers act as wrappers for other products, and a quirk in the rules mean that they will continue to pay commission after the RDR is implemented.” Investment bonds also often pay much higher levels of commission than other investment products. The article went on to quote the FSA as having said “There is concern that some advisers will exploit loopholes in the RDR to continue to earn commission.”
I recently attended an investment forum where the issue of modelling future business profitability was discussed. During the session someone from a major private bank asked how they could deal with their “commission from selling products” in this model. Hello………commission will be as dead as the dinosaurs in 4 months and even some major firms either haven’t addressed this or intend to continue milking their clients until the very last minute.
In the new world, after January, financial advisers will need to have a clear service proposition and be able to articulate this to clients and show the value they provide for their fees. IFA Magazine this week quoted a survey by BlackRock which suggested 87% of advisers have not finalised their client proposition. There is only 4 months until the deadline which isn’t long at all. At Forty Two we started the transition to a fee only financial planning business in earnest in 2002. It isn’t an overnight transition as it requires a complete change in mindset from advising on products to creating financial plans and monitoring progress towards clearly defined goals and objectives. It took us nearly five years to complete the transition to a profitable fee based firm. Any business that hasn’t yet make significant progress down this road is unlikely to be able to make the change at this late stage.
The front page of the Sunday Times Business section last week (26/08/2012) opened with the deadline “Thousands of advisers face ruin – Ban on commissions from the sale of insurance and pensions will push 3,000 firms to brink”. Inside the paper the message continued with another article “The death of a salesman” which asked “With a rotten system of commissions scrapped, can financial advisers still make a living”
Over the coming months (and probably the first few years of the new regime) it is likely that a significant number of advisers will be forced out of the profession. This will undoubtedly reduce the availability of advice but the FSA Head of retail investment supervision Linda Woodall summed it up recently by saying “a surplus of poor advice does no one any favours”.
Next year may well signal the death of a salesman but it will also herald the coming of age of Financial Planning as true profession. True Financial Planners will gradually start to earn the trust of consumers and build a reputation for making a positive impact on the lives of the clients they serve.