Better Business: Unbundle your way to a brighter future

In an extract from their book 'Get the Adviser Advantage: How to Survive and Thrive in the New World of Retail Financial Services', Nick Bamford and Martin Bamford explain that while advice and products are currently packaged for remuneration purposes, advisers need to unbundle this model to be RDR-ready.

Complexity is off putting to many people. In the main, people are drawn to simplicity and respond positively to it. This is very true when it comes down to the complexities of finding suitable financial planning advice.

Clients find an unbundled approach attractive. Yet as an industry we seem to have made an art form out of bundling. Let me provide you with an example and one that I believe needs to change in a firm that wants to become RDR-ready.

Independent financial advice is a classic bundled service. Advice is bundled up with product and product is bundled up with remuneration. This is the standard model in the IFA community but it will change as firms get themselves ready for the onset of the RDR. What we will start to see is an unbundling of each of these components.

Focus

How many times have you done rather a lot of work for a client and then they decided not to proceed and you did not get paid? If the answer is ‘lots of times’ then you probably have a sense of the frustration that accompanies bundling. Even if you are highly successful and the majority of clients take your advice and end up buying a product, you may still suffer this sense of frustration on the odd occasions when they say no.

Back in 2004 we decided that we should only work for those clients who were prepared to pay us. We felt it was wrong to do speculative work where we employed our resources of skill, time, expertise and the client got to choose whether or not to pay for those services after we had done them.

We simply turned the process on its head. We would only work with those clients with whom we had engaged and who had agreed to pay for the advice we delivered. Our focus could therefore be on real clients - people who valued and could see value in what we do.

Engagement

We introduced a system whereby what we did could be broken down into four easy to understand steps. The first of these steps was called ‘engagement’.

When we have first contact with a prospective client, we issue to them a welcome pack. The pack contains a confidential financial questionnaire, an attitude to risk questionnaire and a client agreement letter (the consolidated Initial Disclosure Document). The letter that goes with the welcome pack explains our process for the delivery of advice.

Unsurprisingly, we agree to a first meeting with the client that is without cost to them and without obligation. This discovery meeting is the chance for them to find out if we are the right adviser for them and for us to find out if they are the right client for us. We only attend this meeting if the client has completed and returned the contents of our welcome pack.

After the initial meeting, we write to them with an engagement letter. This letter sets out precisely what it is we are going to do for them and the fee that we are going to charge. We ask the client to sign and return the engagement letter before we are prepared to do any work for them. So we only work for clients, not for prospects.

Advice

Advice is the next step in our system. Of course it involves data capture (all the details you need about existing financial products assets, liabilities income and expenditure) and data analysis, but what is it what does it do?  This is followed by the preparation of a detailed advice report. The report is always presented to the client so that they have the chance to ask and have answered the supplementary questions that arise (they always do!)

Advice stands alone. It does not have to result in a product solution. It is valuable and it has to be paid for. It also enables those who wish to go off and execute transactions on their own, typically via the Internet. Where there is a product solution required, it will not surprise you to know that the majority do come back to us to implement the solution.

Implementation

The implementation stage is putting in place financial product solutions. It may also include altering existing arrangements, such as where the product the client has is perfectly fine, but may be they are invested in inappropriate investment funds.

Of course we charge for implementation activities, as you would expect. In fact, this is really where most of the risk comes into the intermediary business. If you think about it, most of the questions asked by the FSA, the FOS and your PI insurer are about products you have ‘sold’ rather than advice you have provided - this is because they still have a bundled mindset.

Review

What we really want are clients who want us to provide them with ongoing review services. Our business model is really focused around this. We want to get face to face with our clients at least once but preferably twice a year to go through their pensions and investments and make sure they remain suitable, relevant and understood.

We support this by quarterly valuations and client newsletters, and a Monday morning email newsletter as well as a dynamic website with blogs posted on a regular basis. Of course the clients can have ad hoc, face-to-face, email or telephone advice as well. All in all, this is a relationship based on regular contact.

Advantages

At any point in time, we know what we are doing for our clients. At any point in time, we are being paid to do that work.

Unbundling means that you start to eliminate cross subsidy at two levels. First of all, cross subsidy between clients; one client who buys is not paying for the client who does not buy. You also eliminate cross subsidy between client activities. You are not delivering review services many years after you have spent the revenue that you received for advice.

Unbundling also means that it is easier to articulate your client proposition. No longer are you perceived as a salesman - with the greatest of respect to salesmen - and instead you are seen as an adviser. Unbundling drives up the service culture of your firm.