BrilliantWithAdvice

Martin Bamford writes in Money Marketing about why a boring approach towards investment advice makes real sense.

I wish more IFAs were boring. Boring is good when it comes to delivering financial advice.

Recently, we have relished our boring approach to investment advice. By keeping things simple, we have been able to avoid the exciting funds which have failed so spectacularly.

If only more IFAs had stuck to traditional investment funds rather than pushing the next new thing, it would have almost certainly saved us the cost of our FSCS interim levy earlier this year. More importantly it might have helped to improve, or at least reduced the damage to, the reputation of the IFA sector.

The delivery of good financial advice should never be dull but the best advice solutions usually are. Paying off debt, keeping money in cash or switching a few funds within an existing pension plan are often the best course of action. They are rarely the exciting or remunerative solutions an adviser would want to deliver to their clients.

When we read FSA reports of compliance failures around inappropriate investment advice, it always prompts the question ’why?’ What motivates someone to leave the well-beaten advice path in order to recommend funds that could best be described as esoteric? What possesses an otherwise intelligent individual to think a brand new, complex investment fund is ever a good idea?

It’s often suggested that commission plays a role in this wacky decision-making process. Plenty have argued that the commission levels on unregulated funds or structured products are not substantially higher than that available from mainstream funds. Therefore it seems that the desire to impress clients is the root cause of bad investment advice.

In an environment where interest rates on cash are so low and investment markets can be wildly volatile, it is little surprise that some advisers feel only exotic funds will do. Despite decades of evidence to the contrary, there will always be some who feel it is possible to break the unbreakable link between risk and reward.

So rather than simple investment recommendations, some advisers will always recommend what the majority would never dream of touching.

We can only hope to see less of this, improving the reputation of the sector and reducing the cost of compensation when things go wrong.

Perhaps the wholesale introduction of adviser charging and an improvement in standards by the end of next year will prompt a return to sensible recommendations. Perhaps it will result in the new Financial Conduct Authority treating the IFA sector with a little less disdain than that shown by its predecessor. I’m not holding my breath.

Martin Bamford writes in Money Marketing about the reasons for running an IFA business.

I like being in business. When you grow up with business owners as parents, it is almost inevitable you will end up doing something similar.

But it was not until about halfway through college that it became apparent the level of academic prowess needed for a traditional degree in something like history was missing from my genetic make-up. The more practical, less academic subject of business it was then.

Whether we realise it or not, we are all businesspeople. From sole trader IFA to chief executive of a multi-million-pound network, business is the name of the IFA game but often gets overlooked when it comes to debates on the retail distribution review and the future of retail financial services.

From some recent discussions, it would be obvious to conclude that large parts of the IFA sector are voluntary or charitable. All this talk about clients no longer being able to afford IFA services after 2012 and the mass market becoming disenfranchised is confusing.

I do not subscribe to the hard-nosed definition of a business. Companies should be profit-able but there can be more to it. I am re-reading Small Giants by Bo Burlingham, which features case studies of businesses that have chosen to be great rather than big. Some common themes of businesses that are successful by measures including but not limited to profitability are community involvement and creating a great place to work.

All this starts with profitability. Without running a profitable business, other noble goals cannot be realised. Behaving like a business, where the target customer has to fit criteria, means saying no to some people.

I love that IFAs want to help every segment of society. That attitude speaks volumes about the typical people who make up our profession, assuming that the attitude exists for truly altruistic reasons.

But it is time to stop confusing this charitable ideology with running a business.

Here is a suggestion for IFAs who are concerned about disenfranchising the mass market as a result of the RDR. Why not focus on running a business that works with clients who value and can afford what you do and then, as business owners, take some of that profit and divert it to charity?

Or maybe some local IFA business owners could create a charitable foundation to provide independent financial advice to those in their communities who cannot afford to pay for it.

The IFA industry cannot continue to berate the regulator for taking away the ability to work with a client segment that probably should never have been a client segment in the first place.

Martin Bamford writes in Money Marketing about the importance of substance over style when building an IFA business.

We lost a client recently. By lost, I do not mean that their whereabouts became unknown. I mean that he made the decision to move to another IFA firm.

Thankfully, this is a very rare occurrence but when it does happen, we are always keen to find out the reasons behind the move. If it was the result of something we did (or did not) do, then I want to know about it so we do not make the same mistakes in the future.

During the “departing client debrief”, it transpired that moving to a new IFA firm was part of the agreement the client had struck with his accountants because he was refinancing his business and they wanted better control over his personal financial planning at the same time.

Satisfied that he had not been upset by anything we were doing to him business-wise, we used the debrief as an opportunity to get a bit of candid feedback on our approach to the delivery of advice. As they say, feedback is the breakfast of champions.

An interesting comment raised during this debrief was that the offices for the new IFA firm were “really nice”.

This is the sort of comment which is guaranteed to provoke a debate here at Informed Choice. Now, we love our offices, as much as it is possible to feel that particular human emotion for a building. They represent part of the culture of our business and while not a modern glass and steel property sat in a nondescript business park, we often get really positive client feedback when people come to visit.

The debate gradually moved away from one of sanded wooden floorboards and mock Tudor beams onto one of style over substance. It is fair to say that style has never been an over-whelmingly important consideration when building and growing this business over the past 17 years.

I know that style matters a lot to some people. Some businesses have been built more or less on style alone, with the quality of their envelopes and the décor in their reception areas saying a lot more about their client proposition than what they do and deliver.

While some clients will always be impressed by the type of car their IFA drives or where they holiday each year, the vast majority, in our experience, are more concerned with the substance of what their adviser does and delivers.

If we are to collectively restore trust in retail financial services, a move away from the style aspects of what we do towards more of a focus on the substance of the delivery can do no harm at all.

Martin Bamford writes in Money Marketing about some of the regulatory issues facing IFA networks.

The IFA network business model is on the regulatory radar. That is one interpretation of the message contained within the first retail conduct risk outlook report from the FSA.

At a headline level, our friends at Canary Wharf have spotted some potential weaknesses in the control and oversight exerted by networks over their adviser members.

This is an important subject because of the potential impact it could have on every adviser, whether a network member or directly authorised IFA.

If the FSA has identified risks associated with this business model, they are likely to focus their attention on this area during the next few years. It would come as little surprise if more intensive regulatory scrutiny results in the discovery of significant problems, leading to enforcement action and business failure and – our perennial nightmare – big compensation costs for the rest of us to pay.

The network issue is defined in the report as an “emerging risk”, which means that the FSA has proof there are problems but no evidence (yet) of wide-spread consumer detriment.

The risk outlook report points to the challenging economic conditions and considerable financial strain being experienced by some networks. These are businesses that tend to operate on low margins and rely on quickly gaining considerable scale to create long-term viability.

But it is the control and over-sight problems that potentially create the biggest risks of consu-mer and industry detriment. This is not restricted to the network business model. Any regulated firm that continues to allow an individual IFA to form and deliver their own advice is running a business filled with risk.

Checking a percentage of cases has never been a substitute for having central control of the advice process in the first place.

There are reasons why network members would resist any move by networks to exert greater levels of control and oversight, including cost.

Where a firm is taking responsibility for the construction of advice, for delivery to the end client by the individual IFA, they need to put sufficient resources in place.

This shifts the value up the chain towards the network and away from each member. This is unpalatable for many individual network members who still believe they deserve the majority of the value from each client relationship, which is why the ultra low-cost network proposition appeals in the first place.

How can these emerging risks be overcome? Networks need to get their business models fixed now, well ahead of the introduc-tion of the RDR. They must start focusing on profitability and quality, abandoning the dream of scale and turnover, and work more closely with their IFA members.

Martin Bamford writes in Money Marketing about the most efficient way for an IFA firm to deliver advice – as a team.

Everyone achieves more as a team, leveraging the skills of others, focusing on core strengths and pulling in the same direction towards a common set of goals.

The word team has been on my mind a lot as the retail distribution review approaches. Moving away from the debate about minimum qualification requirements and adviser charging, the really interesting opportunities from the RDR are all around business structures.

For the past two years we have advocated a team-based approach to the delivery of financial advice within our own business, a structure we credit to Phil Billingham, who came up with the notion of finder-minder-support to replace the traditional adviser-administrator model.

The old system saw advisers responsible for everything from client acquisition, research and report writing to the submission of new business. They would then have to fight to convince the compliance team that what they had done was suitable.

We used to work on this basis. It is not harmonious and is certainly not very efficient.

Trying to juggle a wide range of skills while growing a business prevents people from reaching their full potential. The finder-minder-support model deals with these inefficiencies by ensuring the right people are doing the right jobs. It allows individuals to focus on their strengths and specialise, adding maximum value to the business. It frees up those in the finder role to acquire new clients and allows minders time to engage with clients face to face.

Comparing these two models raises important questions. Should an individual financial adviser post-RDR really be responsible for research and report writing? Can compliance and suitability ever be consistently achieved in an environment where it is checked after the delivery of the advice?

Within the finder-minder-support model, suitability can be checked before the client is exposed to any advice. Advice is agreed by a support team under the control of the business-owners, who take responsibility for compliance. With this model, the risk of advice being delivered before it is checked for suitability should be minimal.

There will be barriers to overcome if this structure is to become more widely adopted. Advisers have long been used to doing everything in the advice process from ’cradle to grave’.

A team-based approach also requires a rethink on the allocation of remuneration. Advisers who fulfil finder and minder roles should be able to earn more when they have more time to focus on client-facing activity but the value per activity moves from adviser to support team who do more of the valuable work.