Winter/Spring 2012

There are a number of perspectives to consider; not only that of the advisers themselves, but also the degree to which outside influences are helping or hindering advisers' progress and what more could or should be done to address and alleviate these issues.

An obvious aspect is the extent to which advisers are already operating on a fees basis. Many would argue that they are already fee based as they agree the level of their remuneration with their clients and receive this by way of a deduction from the funds that they control whether direct from the fund or from the platform. Just how sustainable is this "bundled" approach?

The fundamental problem with this method of fee/Adviser Charging is that it leaves advisers vulnerable to suffering variation in income levels as the markets fluctuate. Relatively few advisers charge for their services on what might be termed an “unbundled” basis i.e. where they charge for individual services. Anecdotal proof of this is the fact that only a minority of advisers are registered for VAT. This is because many of them have not yet fully thought through their future propositions and as a consequence often find themselves in a cul-de-sac and have to start again.

Another important point to bear in mind is that the progress of advisers towards becoming “New Model Advisers” is in some significant measure dependent on the support provided by providers, fund managers, software companies and platforms to enable specific levels of remuneration to be taken. The required levels of increased functionality to meet the Adviser Charging is for some of them, “work in progress”, and more worryingly in some cases, it may not be delivered until quite close the deadline of 31st December 2012. 

I don’t believe that the concept of the “New Model Adviser” is a myth but rather that the transition to becoming one – and importantly fully RDR ready – is often slow and complex and that the level of effort and detail required are often under-estimated. Firms and advisers therefore need to plan carefully and take careful and considered steps to ensure that not only are they and their colleagues going to be ready but that they also identify which of their suppliers will be able to support them as they transition their services.
 

VAT - Clarity at last?

HMRC has recently published draft guidance that has clarified a number of points in relation to the existing VAT regime that deals with the provision of financial advice following an extensive period of debate.

The joint ABI/HMRC guidance – the amended version published in the second half of 2010 - shed some light on the issues but it raised as many questions as answers and so the need for clarification became overwhelming.  HMRC has now set out seven stages in the financial planning process, and confirmed that if a product is arranged as part of the advice process, then no VAT will be payable. The position in respect of ongoing advice has also been clarified and if the adviser can demonstrate that there is ongoing activity in relation to the existing investments - for example re-balancing, then no VAT will be payable. Where only advice is offered, then VAT will be payable. VAT will also be payable where a client does not make any investments having initially indicated that they would so, unless the adviser can provide documentary evidence that the client had contracted to do so.

What should not be allowed to happen is for the VAT tail to wag the advice dog as this is not helpful to clients or advisers. Advisers should decide what propositions best suit their clients and some will choose to "unbundle" them into a range of services that do not have to taken in their entirety. As a consequence, VAT may be payable in certain instances - for example where a review is carried out where there is no intention to then make investments, and this should be made clear to clients. 
 

Sustainability

Last year I attended a seminar at which one of the speakers from a major UK bank told the audience that "sustainability" was now at the heart of their strategy and that all staff were an integral part of its effective implementation.

In the ensuing question and answer session it was clear that there was a wide divergence amongst the audience regarding the precise meaning of the word "sustainability". A dictionary definition is: "..conserving an ecological balance, avoiding the depletion of natural resources". Not quite what the bank meant but...

The bank's definition of "sustainability" is conserving and growing the customer base to address the combined pressures of the consequences of the credit crunch together with the negative perceptions of banks amongst consumers generally let alone the RDR. The bank has recognised that if it is to survive and prosper it needs to put its customers first and that if it does there will be positive benefits for all concerned.

Have life companies, fund managers and intermediaries also implemented effective "sustainability" strategies? The RDR demands that that the starting point for sustaining their future is to place the client first and to think strategically anticipating the future rather than focusing on short term opportunities.

The decisions made in the lead up to 2013 will be critical to the sustainability of the retail financial services sector. There is still a lot of work to do.

Retail Distribution Review Papers

The FSA continued to publish papers throughout 2011 with monotonous regularity to continue the momentum of 2008, 2009 and 2010.

Whilst the FSA is to be abolished, there is no change in respect of the FSA's main RDR objectives or time table.

Unresolved Issues

A number of recurring issues remain uppermost in the minds of financial intermediaries:

How best and most effectively ensure that their advisers achieve QCF Level 4 status;

How to successfully embrace Adviser Charging and to run a fee based practice;

How to increase and sustain the value of their business; and,

Whether to sell now, wait, and/or seek alliances/support.

For providers and fund managers, they remain focused on the fall-out from the Consultation Paper on legacy commissions - CP11/26, and also on the final outcomes in relation to platform and cash rebates following the publication of  the Platform Policy Statement, PS11/9.

What has become clear, if indeed it wasn't before, is that "the devil is in the detail", and that the more certain aspects of the RDR are scrutinised, the more some questions and issues still need to be resolved, a number of which will require further clarification from the FSA.

And finally...

Corporate Activity; some thoughts

Buyers and sellers are now more savvy having witnessed the outcomes of previous transactions. It is not just the immediate transaction itself that needs to be considered but the impact of earn-outs for the seller and the ease of integration for the buyer.

The iceberg analogy is one for all parties in a deal to remember; there is often more to be concerned about below the surface than what is immediately visible above it. Failure to carry out detailed and systematic due diligence can lead to lasting detriment for any acquirer.

It is also important for any firm contemplating either acquisitions or a sale, to recognise the time it takes to achieve results and the strains that can be imposed on the business if adequate resources are not made available. All too often unsuccessful attempts at acquisitions and sales can and do leave businesses in a weakened position which both erode value and potentially increase risk and instability.

Whilst you you may have a strategic/business plan (only circa 20% of firms do) to help guide the development of your business, are you equally prepared for a possible sale and/or acquisitions? The need for a clearly thought through strategy and the allocation of dedicated resource is therefore paramount.

How would you answer the following questions?

• If you received an approach from a would be purchaser who said that they wanted to purchase your business, have you a specific figure that represents how much you would be prepared to accept?
• Have you agreed this figure with your co-directors/partners and the basis of calculation
• Are you clear what future role you would want/be prepared to undertake and how long you would be be prepared or want to stay on for, once your business has been acquired?
• Are you clear on your personal taxation position and how you would want any deal structured?
• Would you value funds under management, funds on a platform, and retainer fees using the same multiple for each, or different multiples, and if so so what is the basis for applying differential multiples?
• How would you want to deal with your staff in terms of recompense and their future?
• If you were approached by a competitor saying that they would like to sell their business, are you and your fellow directors/partners clear and agreed as to the circumstances in which you would acquire another business and also the preferred structure of any deal?
• Have you got funds in place to make acquisitions, and if not, where the funding would come from?

Taking Action

If you would like to discuss any items in this commentary please feel fee to send me an email (roderic@rennisonconsulting.com) or give me a call on 07977 277416.

Roderic Rennison