Can you scale financial planning?

With the evolving RDR, Macquarie Bank’s John Porteous says firms who want to be well placed for the future should look to combine robust client planning with low cost.

The debate around the practical implications of RDR has raised an interesting question amongst the advice and planning community. For years, many IFAs have been staunch in their defence of "independence". As the RDR has evolved so the costs associated with independent status have become more apparent. This has led business owners and management teams to reflect on their core advice proposition and its viability within the framework of a post RDR definition of independence.

Even those who opt to retain the independent moniker cannot guarantee that this will prove a sustainable move. Given that the FSA has not proposed any pre-certification of independent status, some firms who begin 2013 as "independent" may find that they are effectively "restricted" in the eyes of the regulator.

Striking a balance

Central to this conundrum is the need to strike an effective balance between the industrialisation of underlying advice process and retaining focus on individual client verification/strategic planning - a point that has proven to be a recurring theme in recent FSA Consultation Papers. This can prove a significant challenge for any operation that is based upon a slick and streamlined "turn-key" advice philosophy.

For example, if a firm places reliance on its wealth management proposition (risk profile, platform, model portfolios and rebalancing being typical in this respect) this pre-supposes that the planning and needs assessment necessary in qualifying suitability is robust. Individual suitability is a critical component of the advice process especially where existing products and services are being restructured and has come sharply into focus as a result of past FSA thematic reviews.

I raise this point as the title of this article refers to the scaling of financial planning - not wealth management. Any assumption that client assets can be dispatched to a streamlined investment destination without the inherent suitability overlay is a potential flaw in the strategic construction of the advice model in question. Indeed, the FSA has been clear in its view that model portfolios (and platforms) should not be regarded as default options.

Arguably, this risk can be mitigated by more precise client segmentation. As firms become clearer about what services they offer and the type of individuals targeted, it is likely that planning propositions will evolve from their initial generic state in favour of more tailored offerings. Equally, the ability to handle exceptions to standard process is a helpful acid test in the search for scale.

Not only is the point around exception planning a test to the flexibility of process, it also highlights certain risk and cost issues. This area can determine a firm's ability to deliver repeatable and valuable financial planning services without a material deterioration in marginal cost (ultimately impacting profit). Treading the fine line between detailed client specific planning and consistent process is by definition more art than science and is, in my opinion, best managed through a clear and contractual client engagement letter.

Returning to the "independent/restricted" question, will the additional choice and flexibility that independence can offer prove to be a valued commodity if it is not delivered in a way that maximises the client experience?

At the moment certain advice practices are making their decision based upon an assessment of the costs inherent in the independent route, however, perhaps the more pressing question is - how many firms will be able to thrive in this space while being able to successfully differentiate from their restricted equivalents? In theory, planning firms that are able to offer wider choice and access to a broader range of options should be able to command a pricing premium in respect of fee charging.

Clearly, some firms will have a strategic imperative to choose independent status - such as those who trade with a certain segment of the market such as professional services. Again, an interesting question at this stage of the evolution of tactical business planning in anticipation of RDR is this: How many of my clients will be materially better served by the additional choice that independence will allow?

There is a strong argument to suggest that the optimal shape of an independent adviser post RDR is along the lines of the boutique model. This is because the regulatory hurdles and associated costs (multiple platforms and tax wrappers as opposed to "vanilla" options) drive too much inefficiency into any model process looking to achieve sustainable economies of scale.

Three primary drivers

Irrespective of the process adopted or proposition developed, I believe there are three primary drivers that enable a business to build a repeatable and sustainable client experience.

• Data quality - by ensuring a reliable and single source of data and ensuring that this is a non negotiable aspect of client engagement the cost of advice delivery can be reduced substantially.
• Advice process not sales process - where a sales process is too narrow this often creates confusion and inconsistency in dealing with any exceptions to the norm. Further, by building a robust planning process, the client experience is materially enhanced making fee charging easier on non investment related assignments.
• Measurement - while collection of MI has increased considerably in recent years, a different approach to key metrics should be taken in relation to advice - as it is, by definition, distinct from product transactions. For example, key milestones supporting business transition, targeted client feedback and staff scores against specifically tailored CPD and training assignments.

In summary, a great deal of industry effort has been expended on building investment propositions that are (in no particular order...) more sophisticated, active, passive, cheaper and/or self directed. The real challenge is ensuring clients are consistently suitable for the services offered and filtered accordingly. With the regulatory thinking clear around the need for consistent and demonstrable client validation, the firms that are able to combine the need for individual planning rigour together with low cost and efficient process will be well placed for the future - whatever they choose to call themselves.