OVER the past few years two factors have emerged that have resulted in the need for a more prescriptive approach on how financial advice is provided.
Firstly, the forces of open market competition and the pursuit of short-term profit has led to the practice of dubious sales tactics whereby products are sold either to satisfy the greed of the individuals selling them, or to meet the targets of the company rather than the needs of the consumer.
Secondly, increasing levels of transparency throughout the market have led consumers, consumer bodies, and industry commentators to question whether there is any bias in the advice given to clients. Such bias would be based on the level of commission advisers receive from product providers.
The regulator has duly responded to these. The most high profile and significant response affecting the financial services market is the Retail Distribution Review (RDR). In a nutshell, RDR has been designed to simplify the process by which consumers receive financial advice. A simplification will clarify the fees that clients are paying for their financial services. Not all clients are aware that their advisers receive payments from product providers out of the capital the client invests.
Because the issue of costs and client fees will now be out in the open for all to see and understand, the most significant impact of RDR should be a reduction in the real cost of financial advice. This is because advisers are being – and will continue to be – forced to thoroughly examine their business models.
For many, this is the first time they have questioned and tried to calculate exactly how much it costs to deliver the advice consumers demand and deserve. Hitherto, without this knowledge, advisers have been unable to manage and manipulate their costs and the level of profit they make. This has hindered them from being able to deliver demonstrable value for money services. It is hardly surprising, therefore, that some have been accused of maximising their income at the expense of satisfying their client’s needs and wants.
One of the other outputs we would expect to emerge from this process will be advisers publishing what is effectively a price list of their execution and advisory services. If we accept that most advisers trust evidence that suggests that an increasing number of clients are adopting a self-directed approach to managing all or some of their financial affairs, they will have been (or most certainly should have been) searching for a suitable investment platform.
Not all investors will decide to adopt a self-directed route for all their investment needs. At best, they will take a long hard look at what their needs are and how many of those needs can be satisfied by self-directed means, all the while contemplating whether the DIY option could be cheaper. Of course, the more complicated the subject – for example, the treatment of inheritance tax – the more likely it is that the consumer will need advice.
The adviser who decides to provide clients with an execution-only service will either choose to partner with a suitable provider in some way, or will white label a suitable investment platform. Regardless, they will want to demonstrate that their choice will bring a reduction in cost to their clients.
Existing investment platforms have been improved in anticipation of RDR and plans should have already been made to continue the process of their improvement on an ongoing basis. However, more new platforms have been and will undoubtedly continue to be launched in the weeks and months to come. And as we are all aware, if the supply of direct channels to market increases, the consequence will be that the consumer will expect a reduction in costs.
LOOKING TO THE FUTURE
Going forward, clients and advisers should be cautious to avoid choosing a platform that only delivers cost savings. Clients are more intelligent than that; they know they get what they pay for and what they are ultimately happy to pay depends upon the degree of satisfaction they receive.
Increasing levels of knowledge and expertise in managing their own affairs will create a level of demand from clients for more sophisticated, but easy to use, investment platforms. The provider who is ahead of this game, the provider who can show clients that they have thought of the client’s need before the client has thought it, will be the winner, albeit for as long as it takes competitors to catch up.
Advisers and clients should look out for an investment platform that delivers more than just basic product and service norms at levels of parity pricing. They should look out for a provider who delivers a hub or matrix of intelligent, client-focused, technology driven products and information services. Such a platform will be highly intuitive, elegant, simple to use and deliver low cost execution.
I would recommend readers investigate Gekko’s TradeHub® platform via www.gekkomarkets. com. But I would, wouldn’t I?