Applying Darwinian theory to IFAs to avoid extinction
As Darwin said, “It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change.”
So it will prove with IFAs – those with the most adaptive response to the RDR are best set to thrive. The basic idea behind the RDR is simple enough – place the client at the heart of the business. Advice for the client, paid for by the client. A fully professional, highly qualified body of advisers, whose relationship with investment and product providers is entirely at arm’s length and driven only by what the end client needs.
All of this has to be a good thing from a strategic standpoint. It will result in a reduction in advisers and integrated manufacturing/distribution businesses will need to take up the slack – particularly with the mid to low net worth clients. But for the independent advisory sector this new world has massive potential.
Take remuneration – in the old world the adviser who received the best commission was not necessarily the best – he was just the biggest or as Darwin would say the strongest. But in a fee only world the best fees will accrue to the best advisers. As they do in any other professional circle. Or to be precise to the best in their profession who also apply professionalism to all aspects of their business. It’s no good being the smartest legal brain in town if no one has heard of you. It’s no good being the best pensions or investment adviser if you are the only one to see it that way.
So marketing, PR and a whole raft of good business practices will have to enter the mix along with core professional excellence. The reward for excellence will be a more dynamic market place where clients will pay more for excellence and less for mediocrity – which all sounds healthier than some arcane convention like commission, for example. Now this is not to imply that independent advice will be better remunerated – it won’t. On aggregate it will be less well paid; clients will only pay decent fees where they see value. But the distribution of remuneration will be bell shaped rather than flat as a commission rate.
So let’s assume the RDR comes in just less than three years from now, no slippage. The question is do we (a) anticipate the spirit and the letter and transform our businesses now and become a pure fee only firm and eschew any free or near free overtures from providers; cease asking providers for inflated conference attendance fees; allow revenues only from those we serve, the client; and similarly should providers halt or phase out the payment of commissions, launch uber clean products and seek to differentiate only on “real” grounds, like investments, product or service.
Or (b) do we all make hay while the sun still offers a few warming rays?
My view is that the time has come to say that (b) won’t work – it may provide a couple of years of high revenues but if you play that game the transition to the new world will be too difficult. There will be no time to adapt. The time has come now to assess your skills – think how much a client would pay for them – up skill as required or outsource if that makes more sense. But fundamentally, advisers need to minimise any dependency on providers of any sort – your core strategic relationships must be with your key clients, not with the hands that used to feed you.