Why firms will go the extra mile for independence

John Porteous, chartered and certified financial planner, considers whether advisers really need to have independent status post-RDR.

Most financial planners have long held their ‘independence’ as an important part of the fundamental advice proposition they offer to clients – irrespective of how they have chosen to charge for these services.

It is interesting to note, therefore, the comments made in the press/social media channels recently about the economic viability and/or risk of retaining independent status post RDR.

It strikes me that, in some quarters, the debate around ‘independence’ has become a metaphor for industry concerns that extend well beyond the basic classifications contained within a client agreement.

Firstly, even a cursory glance at the various iterations of the RDR show there is more to consider than examination success and implementation/execution of a sustainable adviser charging model.

Further, despite the somewhat stark difference in terminology (restricted implying limitation or omission), the reality is that the scope of advice (retirement, investment, protection, tax planning etc.) may remain similar for either category of adviser.

As is likely to become increasingly apparent in the months ahead, ‘restricted’ does not mean ‘tied’.

Perhaps the key issue here is really one of basic economics.

Essentially – what is the cost of delivering a compelling client proposition and is this recoverable within the context of a reasonable profit margin?

The real challenge here is that the costs of transition to a fully compliant post-RDR independent operating model will vary significantly between firms, depending on a number of variables:

• skill sets and qualifications of existing advisers and staff;
• training and supervision costs in respect of the above;
• salary expectations of highly qualified advisers (likely consequence of supply/demand);
• characteristics and expectations of existing clients;
• core operational systems and process;
• contractual deliverables relating to new ‘client proposition’;
• additional costs of complicity (research budget, cost of capital, PI differential?);
• regulatory costs.

It seems inevitable that costs within the planning community will rise – even for those who choose to take the restricted route. Arguably, many firms will not be able to get a really good handle on their cost base until late 2013, especially in relation to the costs associated with servicing clients in line with client agreements (although, many firms will have already re-priced their service proposition to cater for this).

Perhaps one of the most obvious cost differentials between independent and restricted firms relates to the way that investment/wrap platforms are utilised. In my opinion, this is an area where well-intentioned regulation has the potential to deliver a number of unintended consequences.

Based upon past FSA comments, advisers with a homogenous client base could potentially use a single platform without compromising its independent status (although with the requirement to consider a wide range of wrappers – the practicality of this may remain a challenge).

Clearly, for those firms or networks covering a range of different client segments spanning various needs, expectations and net worth, it is difficult to see how a single platform would work as a default option if they want to retain independence.