Forced change or good business practice?

The RDR will force many adviser firms into a programme of business change. Fiona Tait, business development manager at Scottish Life, looks at how some firms have already turned it to their advantage.

Commission ban

The RDR will ‘ban commission’ from the end of 2012, forcing those firms who rely on this form of remuneration into a business change programme. This is a massive upheaval. But before we get carried away, it is important to understand the terminology being used. Some types of remuneration will survive, which some people would certainly describe as commission.

The FSA is not expecting advisers to charge only fees. The requirements for adviser charging are:
1.    The adviser must have a clear charging structure (or structures) which can be provided to clients in advance of their agreeing to pay for any services.
2.    The charging structure should be related to the range of services provided.
3.    The client can then agree with their adviser which services they wish to pay for.

The following all meet these criteria:

• Adviser charging is set by the adviser and agreed with the client. The charges may then be deducted from the investment.
• Consultancy charging is set by the adviser and agreed with an employer on behalf of the members of a Group Personal Pension. Again, this may be paid via a deduction from the product.
• Ongoing adviser charges must also be explicit and set by the adviser based on the services provided. As such, traditional renewal commission will not be allowed (as it is set by the provider and paid for via an amc). A percentage charge (i.e. FBRC) is allowed, so long as the charge is disclosed separately from the product charges and not included in the AMC.
• Fees are, of course, acceptable as they are explicit and not influenced by the choice of product.

However, traditional provider-driven commission, including initial commission, which is set by the product provider based on the size of the investment and deducted via an ongoing AMC, will not be allowed post-2012.

It is worth emphasising the FSA is not dictating how much you charge for your services, or indeed which services you offer to your clients. These are matters for you to decide. What is required is that the charging structure you decide on is clear and transparent.

Other industries

There are many books designed to help you to run your own business, and many business consultants too. It is certainly worth looking outside our industry to identify the big, generic issues before looking at those that are industry or firm-specific.

One thing you will notice is that good business practice is not rocket science. Much depends on very simple principles. The difficult bit is not identifying them, although you must take the time out to do this. It is finding the discipline to stick to the good practices once they are in place.

In his book Good to Great, Jim Collins investigated a number of businesses that had gone from being successful to being extremely successful in recent years. He analysed their business practices and identified a number of key principles that were common to them all.

The principle that stood out most was the idea they all had a strategy to make a profit on each individual unit of their businesses so that, by extension, the overall business becomes profitable. Collins calls this creating “profit per x”.

Financial services

In the case of financial services companies – both advisers and providers – the basic unit, x, is the client. Some years ago, Scottish Life recognised it was not making a profit on each client and decided to do something about it.

The main problem was that its products were long-term investments and it had a charging structure that depended, for profitability, on our clients leaving their money with it for the bulk of the policy term. Most did not, and we lost money on them.

As a result of this insight, it introduced a new charging structure, called the financial adviser’s fee (FAF), which recovered the adviser’s remuneration charges from the product up front. Now its products are profitable and so is the company.

Advisers face a similar problem with adviser charging. Most of the work an adviser does for a client is carried out up front, but often this isn’t appreciated, as the client only sees a tangible result – one that they value – over time.

Clients are, of course, more willing to pay for your services when they can understand the value of what you do. The challenge is either to persuade your clients to pay for the initial service up front, or to use long term profits to offset the initial cost of taking on a new client. Or both.

Financial advisers

Following Jim Collins’ lead, Scottish Life decided to analyse the common features of successful fee-based adviser businesses and also found some striking areas of common practice in spite of very different client propositions. Successful fee-based adviser firms:
1.    Record their time
2.    Offer a menu of services for their clients to choose from
3.    Know what it costs them to service each individual client
4.    Regularly review progress against a three- to five-year business plan

These steps (and I have yet to find a fee-based firm that doesn’t follow them) allow the business to identify which clients are profitable and which are not. The adviser then has two main actions to take:
1.    Make sure they keep the profitable clients
2.    Decide what to do with the unprofitable ones.

The first is relatively easy – ensure they get the best service you can provide (hopefully they already are!) The second is less easy, but it can have a massive impact on your business. You have two choices with clients who are currently unprofitable, or only marginally profitable. You can drop them or you can reduce the amount of time you spend dealing with them.

If the latter route is chosen, technology can be used to streamline processes and as much work as possible can be assigned to other (less expensive) members of your team. As an example, Scottish Life created the Account Management Unit, which provides a high quality telephone-based service to IFAs who may be geographically remote.

Where to start

Let your clients know what is going on. You have to implement adviser charging by the end of 2012. The clients who are most likely to object are those who are perfectly happy with the current system. People do not like change. So don’t leave it any longer, write to them now so they have time to understand and adjust.
The implementation timetable might look like this:

• 2010/11 Write to clients advising that you will be basing your future charges on the services you provide to each client. Start monitoring how your time is spent per client and per service.
• 2011/12 Provide each client with a dummy account showing the services you provided in 2010/11 and how this will be charged after 2012. Have a discussion about whether they wish to alter the service package they currently receive.
• Before 1 Jan 2013 Start adviser charging. (You can do this immediately for those clients who are happy with the concept, working with providers who already offer a form of adviser charging.)