The UK financial advisory industry is about to undergo massive change as polarisation rules, which require either independent or tied status, are abolished.
Currently, 65 per cent of the market is made up of independent financial advisers (IFAs), who act for clients, sell the best in the market and have agencies with every provider. The remaining 35 per cent are tied agents, or representatives, who sell products for life companies, but still have a duty to clients to give good advice.
The number of IFAs is increasing while the number of tied-agents is decreasing, as insurance companies find independent distribution cheaper and shed their sales forces.
There are currently no multi-tied agents selling products for multiple life companies, and where providers build strategic relationships with each other to offer packages to client-facing distributors. However, this is one of the arguments for the intended removal of polarisation, which should cause significant increase in multi-ties, reduction in the number of independents and allow providers to take bigger stakes in advisers.
Following depolarisation, it is anticipated that IFAs will only be able to call themselves independent if they offer a fee option to clients before giving advice. Everyone else will either be called advisers or salesmen. Detailed rules have yet to be completed.
Regardless of status, anyone can call themselves a financial planner, though there are only about 250 Certified Financial Planner (CFPs) qualified planners, who conduct advice-led rather than transaction-led business. This group is a sub-set of the financial adviser community, with nearly all being IFAs.
However, the number of CFPs is slowly increasing, particularly among young advisers, as they seek to develop other value-added propositions on a fee-for-service basis. Many are identifying financial planning as their chosen methodology for conducting advised sales, particularly for more sophisticated clients. But for more simple situations, product solutions are still the name of the game.
Some middle-to-large firms are now splitting their businesses to focus on comprehensive, financial planning at one end, and solution-based traditional advice at the other.
Jason Butler, CFP for UK-based Bloomsbury Financial Planning, says: “The split is gradually changing in favour of financial planning, though I am not convinced firms and advisers actually understand the fundamental difference in the mindset of a financial planner with that of a financial adviser, or product salesperson.”
Nick Cann, chief executive for the Institute of Financial Planning (IFP), says many firms struggle to make the change, because incorporating cultural change to a business is difficult, and takes time and capital.
Issues affecting
the UK market
UK advisers face several issues, such as problems obtaining and paying for professional indemnity insurance, constant regulatory change and the cost of compliance.
This is compounded by decreased consumer confidence due to poorly performing stock markets, a property and bond bubble which is likely to burst, and massive over-borrowing by consumers, in part, caused by poor financial education.
The market is also expected to see a further fallout in the institutional arena, with at least one major institution failing. The combination of these issues is likely to see a polarisation of the advisory community, with networks on the one hand and large dominant firms on the other.
Demand for high quality fee-based financial planning advice far exceeds supply. The market for this service at the very top end caters for over 600,000 individuals and in the semi/mid-affluent market, over six million.
Once the private banks and wealth management companies wake up, the market is likely to see massive growth on the back of more aggressive marketing of financial planning as a product in itself.
Cann says: “There are certainly going to be some difficult times for a number of advisers over the next 12-18 months, although a really positive future for those prepared to commit themselves to the change.”
Fee versus commission
Most UK IFAs are undercapitalised, according to Campbell Edgar, a CFP for Bloomsbury Financial Planning. He says IFAs rely on indemnity, or upfront commissions, and find it very difficult to build up the reserve required to make the transition to asset-based fees, or renewals, and specific fees for advice.
In order to get capital, IFAs are either consolidating with other firms or signing deals with product providers.
One driver is the squeeze on commissions in the one per cent world, which dictates that advisers can only charge one per cent for Charges Access and Terms (CAT) mark and stakeholder products.
For these products, advisers tend to favour commissions over fees, with an increased likelihood they become multi-tied advisers or salesmen, rather than independent.
Generally, IFAs prefer to charge fees, mainly resulting from the weakness of their business model during the recent bear market, and rely heavily on selling equity-based financial products or asset-based fees linked to equities and mutual funds.
Professional standards
The entry level qualification for advisers is the Financial Planning Certificate (FPC), through the UK regulator, the Financial Services Authority (FSA). It recently produced a Consultation Paper (CP 157) proposing a range of extra exams to improve standards.
The FPC will continue to be the entry qualification, but those advising in complicated areas will have to obtain an appropriate advanced technical exam for areas such as portfolio management or pensions.
A financial planner would sit above a financial adviser, who would in turn sit above lower-tier non-advised product distributors.
This is broadly the case at present, but the proposal brings all modules together towards professional status. Financial planning would sit at the top of the professional hierarchy, awarded to those qualified to the advanced level, with financial planning skills.
The FSA paper included a draft version of the International Standards Organisation (ISO) universal definition of financial planning, to act as the blueprint for the financial planning exam syllabus.
Ian Shipway, director for UK Hayward Chambers Financial Planning, says: “The ISO should have a positive impact, as more advisers work to the sixth stage advice model.”
