At the same time, we are seeing new European packaged retail and insurance-based investment (PRIIP) regulation from January 2017, which will bring the marketing of investment bonds across Europe into line with the regulation of securities products.
However you look at it, the old ways of opaque products and heavy up-front or exit charges are about to go.
So what are the implications?
To start with, the move to adviser charging and away from commission in the UK has led to a number of benefits to advisers. What we have seen in the UK is effectively an increase in the annual fees advisers charge, coupled with much lower initial fees, at the expense of high initial commissions.
This has the result that the relationship between advisers and their clients becomes much more open and transparent and more service orientated, as opposed to transactional for the sale.
In turn this leads to a more trusting and strong relationship moving forward and no nasty surprises when the client comes to collect their money and there are heavy exit penalties to be paid.
“Once bitten, twice shy” as the saying goes, and having been bitten once, you won’t see these customers again.
Parallel strategy
The problem then, is how advisers move from a business model that depends on high initial commissions to one of annual adviser charges or fees, and the gap in finances that this means.
In the UK, the answer has been a parallel strategy of moving some clients to an annual fee while some continue to be serviced on an initial commission strategy. Over time, more and more are moved towards annual fees.
By starting this process early, the transition becomes much less onerous as the strain on finances is spread over longer. This is what we have seen in the UK, as many advisers saw the writing on the wall long before the RDR actually arrived.
Reliable and recurring income
The other benefit from this move to annual fees as opposed to initial commissions is that the existence of a stream of reliable and recurring income means that the adviser’s business builds up an embedded value much faster than with a business model where you wake up on 1 January with a whole load of expenses to be paid but no expected income unless you get out selling; such an unstable business model does not attract buyers.
The fee model builds up a valuable business where, if the business is placed on a platform, the business becomes much more transparent and easy to value – and hence more straightforward to sell when that time comes.
At the same time as the move to fees has become the norm in the UK, the investment market has become dominated by platforms, with over 85% of investment business now done through them due to the business efficiencies that platforms bring.
What makes a platform?
There is often a debate over what precisely constitutes a platform but in my mind there are two factors that distinguish platforms that advisers use and both of these are different aspects of the same thing: business efficiency.
The first is the use of technology and online processing, which is even more of an issue in the worldwide ‘offshore’ markets where trading in the market has until now been fax and paper based.
The Novia platform is entirely on-line and in fact we do not accept paper applications. The impact is that advisers can place business with us 24 hours a day, wherever they are situated; and, with applications being ‘straight through’ into our back office systems, errors in the application process are eliminated.
The other distinguishing factor is that platforms give a single point of entry into a very wide investment universe, so effectively an adviser is working with one entity to place all of their investments resulting in significant time savings.
These efficiencies feed straight into substantial savings for the adviser business, explaining why platforms have dominated the market in the UK so quickly.
Opportunity knocks
The change in the offshore market, which is undoubtedly on the way, isn’t something to be afraid of, but rather should be seen as an opportunity and it is those that grasp the opportunity quickest that will prosper.
